Econ flashcrads surplus/tax/subsidy/behavioural econ

Define consumer surplus.

Difference between what consumers are willing to pay and what they actually pay.

Define producer surplus.

Difference between what producers receive and the minimum price they would have accepted.

Define indirect tax.

Tax on expenditure/goods, initially paid by producers but potentially passed onto consumers through higher prices.

Specific vs ad valorem tax?

Specific = fixed amount per unit → parallel supply shift.
Ad valorem = percentage of price → pivoting supply shift.

Indirect tax — full mechanism?

Tax ↑ → firms' costs ↑ → S shifts left/up → equilibrium P ↑ + Q ↓ → CS and PS ↓ → government receives tax revenue + deadweight welfare loss occurs.

Who bears more of an indirect tax?

Whichever side of the market is more price inelastic, because it is less able to change behaviour.

Demand very inelastic — tax incidence?

Consumers bear relatively more of the tax.

Supply very inelastic — tax incidence?

Producers bear relatively more.

Define subsidy.

Government payment to producers that lowers production costs and shifts supply right/down.

What does traditional economic theory assume about consumers?

They are rational, use available information and attempt to maximise utility.

Define bounded rationality.

Individuals cannot process all available information and therefore use heuristics/shortcuts.

Define bounded self-control.

People make choices that conflict with their long-term self-interest.

What is anchoring bias?

Over-relying on the first piece of information encountered.

What is herd/social behaviour?

Copying the behaviour/choices of other people.

Availability bias?

Overweighting information that is easy to recall.

Define nudge.

Altering the choice environment/default to encourage a particular decision without removing freedom of choice.

How does behavioural economics challenge rationality?

Limited information-processing → heuristics → systematic biases + bounded self-control → choices deviate from utility maximisation → justification for nudges/intervention.