AP Micro 2.6-2.8

Consumer’s Willingness to Pay

The maximum price a consumer will buy that good

Individual Consumer Surplus

Net gain a buyer achieves from the purchase of a good

Willingness to pay - price paid

Total Consumer Surplus

Sum of individual consumer surpluses

Equal to the area below the demand curve but above the price

Cost

The lowest price a seller is willing to sell the good

Individual Producer Surplus

Net gain between the price the seller gets and the cost

Price received - cost

Total Producer Surplus

Sum of individual producer surpluses

Equal to the area above the supply curve but below the price

Equilibrium

An economic situation when no individual would be better off doing something different

Where the supply and demand curves intersect

Equilibrium price

The price at the point where the supply and demand curves intersect

Equilibrium quantity

The quantity of the good where the supply and demand curves intersect

Disequilibrium

When the market place is above or below the equilibrium point

Surplus

When the quantity supplied exceeds the quantity demanded. This occurs when the price is above the equilibrium level

To move back, the price of the good will fall

Shortage

When the quantity demanded exceeds the quantity supplied. This occurs when the price is below the equilibrium level

To move back, the price of the good will rise

Demand Curve Shifts Right in Equilibrium

Assuming the supply curve remains the same, when demand for a good or service increases, the equilibrium price and equilibrium quantity of the good or service both rise

Demand Curve Shifts Left in Equilibrium

Assuming the supply curve remains the same, when demand for a good or service decreases, the equilibrium price and equilibrium quantity of the good or service both fall

Supply Curve Shifts Right in Equilibrium

Assuming the demand curve remains the same, when the supply of a good or service increases, the equilibrium price falls while the equilibrium demand rises

Supply Curve Shifts Left in Equilibrium

Assuming the demand curve remains the same, when the supply of a good or service decreases, the equilibrium price rises while the equilibrium demand falls

Total Surplus

Total net gain to consumers and producers from trading in a market.

Sum of consumer and producer surpluses

Three caveats about efficiency markets

Efficient markets are not always fair nor equitable

Some markets fail to deliver efficiency

Maximizing total surplus does not mean everyone benefits. Buyers with low willingness or ability to pay and sellers with high cost will lose out.

Trade-offs between equity and efficiency

Policies that promote equity can sometimes decrease efficiency

Policies that promote efficiency can sometimes decrease equity

Improving equity can be difficult because equity is harder to define than efficiency. What is equitable to some may not be to others.

Regressive Tax

Tax in which high-income taxpayers pay a smaller % of income than low-income taxpayers

Progressive Tax

A tax in which high-income taxpayers pay a larger % of income than low-income taxpayers.

Proportional Tax

A tax in which all taxpayers pay the same % of income

Excise Tax

Tax on sales of a particular good or service

Deadweight Loss

Net loss to society resulting from an inefficient quantity of output

When quantity is inefficiently low, that loss is the total surplus forgone on the transactions that would provide a net gain to society but did not occur

Lump-Sum Tax

Tax of a fixed amount paid by all taxpayers

Administrative Costs

Resources used by the government to collect the tax, and by taxpayers to pay it, all over the amount collected

Subsidy

Government payment made to assist or incentivize producers or consumers

Price Controls

Legal restrictions on how high or low a market price may go

Price Ceiling

Maximum price sellers are allowed to charge for a good or service

Price Floor

Minimum price buyers are required to pay for a good or service

Black Market

Market in which goods or services are bought and sold illegally

Minimum Wage

Legal floor on the hourly wage rate paid for a worker’s labor

Quantity Control / Quota

An upper limit on the quantity of some good that can be bought or sold

License

Gives the owner the right to supply a good or service

Demand Price

The price at which consumers will demand that quantity

Supply Price

The price at which will producers will supply that quantity

Quota Rent

Difference between demand and supply price at the quota amount

These are the earnings that accrue to the license-holder from ownership of the right to sell the good or service

Equal to market price of the license when the licenses were traded