Economics U2 Microeconomics

Producer surplus

Producer surplus

Refers to the difference between the price

received by firms for selling their good

and the lowest price they are willing to

accept to produce the good.

Consumer surplus

Refers to the difference between the

highest prices consumers are willing to

pay for a good and the price actually paid.

Price control

Refer to the setting of minimum or maximum prices by the government (or private organisation) so prices are unable to adjust to their equilibrium prices determined by supply and demand. They results in market disequilibrium, and therefore in shortages and surpluses.

Price ceiling

A maximum price set below the equilibrium price, in order to make goods more affordable to people of low incomes.

Price floor

A minimum price set above the equilibrium price, in order to provide income support to farmers or to increase the wages for low-skilled workers

Indirect tax

• Imposed on spending to buy goods and services. They are paid partly by consumers and partly by producers.

  • Excise tax: on specific goods and services

  • Taxes on spending on all (or most) goods and services such as VAT

Subsidies

Refers to assistance by the government to individuals or groups of individuals, such as firms, consumers, industries or sectors of an economy.

Marginal cost

The additional cost for producing one extra unit of a good or service

Marginal benefit

The additional benefits to consumers from consuming one additional unit of that good

Common pool resources

• Resources that are not owned by anyone, do not have a price and are available for anyone to use without payment or restrictions.

• E.g. Clean air, lake, wildlife…

• It is rivalrous (consumption by one person reduces the availability for another) and non-excludable (It’s not possible to exclude (ban) someone from using a good or resource)

Market failure

Refers to the failure of the market to allocate resources efficiently.

Externality

Occurs when the actions of consumers or producers give rise to negative or positive side effects on other people who are not part of these actions and whose interest are not taken into consideration.

Demerit goods

Goods that are considered to be undesirable for consumers, which are overproduced by the market.

Merit goods

Goods that are held to be desirable for

consumers, but which are underprovided

by the market.

Allocative efficiency

An allocation of resources that results in

producing the combination and quantity

of goods and services mostly preferred by

consumers. The condition for allocative

efficiency is given by MSB = MSC (marginal

social benefit = marginal social cost or P=

MC (price is equal to marginal cost);

alternatively it is when social surplus is

maximum.

Negative production externalities

Refers to external costs external costs created by producers. Any negative effect of production on third parties that brings them costs. MSC/MPC

Negative consumption externalities

Refers to external costs created by consumers. They occur when an individual's consumption of a good generates a negative effect on third parties who were not factored into the decision to consume that good.