ch. 4 - economic efficiency and gov intervention
perceived value - market price…
= positive: individual consumer surplus (worth it, good deal)
= negative: consumer thinks its not worth it
total consumer surplus = ½ x total purchase (Qd) x height (the highest individual surplus)
producer surplus = business profit
profit = revenue - cost
price - marginal cost =
total producer surplus: total industrial profit
½ base x height = ½ x Qs x highest ind. profit
base: total quantity that a firm sells
height: highest individual profit
economic surplus = measures how high the economy is
= total consumer surplus + total producer surplus
price floor = lowest legal minimum price that buyers have to pay in order to protect sellers like farms/labor workers, etc.
results: more people are willing to work, bc minimum wage is higher
its okay to be above, but not below.
free market equilibrium → cannot be reached if it is below
minimum wage needs to be at a point that reaches the free market, but also minimum wage
product market - consumers are the buyers
production factor markets: businesses quire the necessary production factors
ex: commercial space, labor…
things that effect the price floor…
increased quantity of the supply
minimum wage
when employers see a higher min wage = they see higher costs
maybe using technology to replace workers
find a new way to use resources
price floor effects…
price floors makes the ones who remain hired happy, but makes employers/buyers less happy
makes people who want to work but cannot find employment unhappy
makes businesses unhappy
price ceiling = legal maximum price that sellers have to accept
aims to help buyers in the market by imposing a ceiling
example: rent control, utility cost control, gas?
government intervention if the price becomes too high
market effects with price ceiling…
consumers: happy with the regulation
want to buy more
overall economic surplus: smaller
businesses with price ceiling: losing, prod surplus is smaller
buyers: some gain some lose
buyers who receive the product benefit bc they receive the lower price
buyers who want to buy but dont get the product: no consumer surplus
taxes =
taxes on buyers = demand curve goes to the left
an additional cost to buy, leading to weaker demand
taxes on the business (fees, proper income, ect..) = supply curve goes to the left
tax is an additional cost to the businesses
taxes effects:
taxes on buyers → reduces the amount of demand, lower sales, higher price
business tax → increase in price, lower sales