Principles of Microeconomics - Chapter 4: Economic Efficiency, Government Price Setting, and Taxes

surplus

something that remains above what is used or needed

consumer surplus

the difference between the highest price a consumer is willing to pay for a good and service and the actual price the consumer pays

producer surplus

the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives

price ceiling

legal maximum price that sellers may charge

price floor

legal minimum price that sellers may charge

competitve market equilibrium

quantity demanded equals quantity supplied, allowing all willing buyers and sellers to transact.

economic intervention effects

reduces economic efficiency

rent control

legal limit on rent that landlords can charge for an apartment (price ceiling)

government imposes and relies on taxes for

its revenue to finance its operations

economic surplus

sum of consumer surplus and producer surplus

government induced price ceiling or price floor causes

economic surplus to reduce

marginal benefit

additional benefit to a consumer for consuming one more unit of good or service

consumer surplus is equal to

area below demand curve and above market price

surge pricing

pricing strategy where firms like Uber adjust prices based on variables like weather, time, and driver availability

marginal cost

change in a firm's total cost from producing one more unit of a good or service

consumer and producer surplus measure

net benefit not total benefit

two ways to think about economic efficiency of competitive markets

1. marginal benefit and cost

2. consumer and producer surplus

only at competitive equilibrium,

marginal benefit equals marginal cost

equilibrium in competitive markets is the

most economically efficient level of output

economic surplus is at its maximum when

the market is in equilibrium

deadweight loss occurs when

market is not in equilibrium

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

economic surplus is the best measure for

the benefit to society from the productive of a good or service (total net benefit)

producers or consumers dissatisfied with the competitive equilibrium price can

lobby the government to legally require producers to charge a different price

farm program

government intervention in agriculture causing a price floor

the farm program resulted in

large surpluses of wheat

subsidies

cash payments

minimum wage is the most controversial

price floor

supports of minimum wage say

it raises income of low-skilled workers

opponents of minimum wage say

it results in fewer jobs and imposes large costs on small businesses

minimum wage causes

an increase is the supply of workers but a decrease in a demand for workers

econometric techniques

advanced statistical methods to analyze real-world data

illegal market

buying and selling take place at prices that violate government price regulations

shortages of apartments causes

desperate tenants willing to pay landlords rents higher than the law allows

rent controls can lead to an increase

in racial and other types of illegal discrimination

government imposed price floors or ceilings causes three things:

1. some people win

2. some people lose

3. loss of economic efficiency

price gouging

increase in prices of essential goods, particularly during an emergency

positive analysis

concerned with what is

normative analysis

concerned with what should be

tax results in a

decline in economic efficiency, causing less of a good or service to be produced and consumed

public finance

analyzing taxes in a field of economics

after producers pay the tax for government revenue,

both consumer surplus and producer surplus is reduced

deadweight loss from a tax is also called

excess burden of the tax

tax can be efficient if it

imposes a small excess burden relative to the tax revenue it raises

tax incidence

the actual division of the burden of a tax between buyers and sellers in a market

Federal Insurance Contributions Act (FICA)

largest tax many people of low or moderate income pay

FICA funds

Social Security and Medicare programs