econ supply and demand part 2

consumer surplus

difference between what consumers are willing to pay for a good or service and price that consumers actually have to pay

producer surplus

difference between market price and amount that a producer would be willing and able to accept for the good

how to calculate:

• market’s consumer surplus

• market’s producer surplus

½ (b) (h)

calculation of Market surplus, economic surplus, and economic welfare

consumer surplus + producer surplus

deadweight loss (DWL)

loss of economic activity

area of consumer surplus

area from the market price up to the demand curve

area of producer surplus

area below the market price and to the supply curve

total consumer surplus

area below demand curve to the market price

elasticity of demand

change in price, either up or down leads to relatively larger change in the quantity demand

determinates of elasticity

• substitutes

• can delay purchase

• large portion of budget

determinates of inelastic

• few or no substitutes

• can’t be delayed

• small portion of budget

how to calculate TR

QD times P

normal good

income and quantity demanded move in the same direction

E>0

inferior good

the income and quantity demanded move in opposite directions

E<0

sticky good

change in income has no effect on the quantity bought

E=0

elasticity of supply

change in price, up or down leads to a relatively larger change in the quantity supplied

substitute goods

increase in price of one good leads to demand for rival product

complementary good

decrease in price of one good leads to an increase in demand for another product

independent products

unrelated products have a zero cross price elasticity

ex: price of small food inc. and quantity demanded for t-shirts doesn’t change

ceilings

• price of ceiling sets a legal maximum on the price at which a good can be sold

price set below market equilibrium

• if price is set above equilibrium, it is not binding (no impact on market because the price can move to equilibrium without restriction)

floors

• price floor sets legal maximum on the price at which a good can be sold

price set above the market equilibrium

• binding price floor causes the quantity supplied to exceed the quantity demanded, or a surplus

consumer and producer surplus: price ceiling

• consumer who manage to find a product at a lower price gain because they now pay a price lower than before, so their consumer surplus goes up

effective price ceiling will lower the price of a good, which means that producer surplus will decrease

• area where consumer and producer surplus is lost in the market is the DWL in graph

consumer and producer surplus: price floors

• consumer who manages to find a product at a higher price lose because they now pay a price higher than before, so their consumer surplus goes down

effective price floor will raise the price of a good, which means that the producer surplus will increase

excise tax

tax on the sale of good or service (on producer)

excise fine

first time fines for selling illegal sig.

end result no matter who is taxed

price sellers receive will increase

price consumers pay will increase