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Terms in this set (34)
------surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. This component of economic surplus is illustrated in the diagram to the right by area-----
A price ceiling is a legally determined-----price that sellers may charge. A price floor is a legally determined----price that sellers may receive.
------surplus is the difference between the lowest price a firm would be willing to accept and the price it actually receives. This component of economic surplus is illustrated in the diagram to the right by area -----
Consumer and producer surplus measure the _____ benefit rather than the _____ benefit.
Deadweight loss is the reduction in economic surplus resulting from a market not being in competitive equilibrium. In the diagram to the right, deadweight loss is equal to the area(s):
Economic efficiency is
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
Economic surplus in a market is the sum of _____ surplus and _____ surplus. In a competitive market, with many buyers and sellers and no government restrictions, economic surplus is at a _____ when the market is in _____.
consumer; producer; maximum; equilibrium
In the diagram to the right, marginal benefit-----marginal cost at output level Upper Q 2
This output level is considered economically---
is equal to
In the diagram to the right, illustrating a binding price ceiling at P3, the amount of producer surplus transferred to consumers is represented by area------and the deadweight loss is equal to areas
B and D
In the diagram to the right, illustrating a binding price floor at P1, the amount of consumer surplus transferred to producers is represented by area---and the deadweight loss is equal to areas
C and E
A black market is
a market in which buying and selling take place at prices that violate government price regulations.
"Rent controls, government farm programs, and other price ceilings and price floors are bad."
This is an example of a
normative statement. The statement is concerned with what should be.
When the government imposes price floors or price ceilings,
some people win, some people lose, and there is a loss of economic efficiency.
Tax incidence is
the actual division of the burden of a tax between buyers and sellers in a market.
In the diagram to the right, illustrating a per-unit tax equal to P2 minus P3, tax revenue is represented by the areas----and the excess burden of the tax is represented by areas--
D and F
E and G
Which areas in the graph represent the excess burden (deadweight loss) of the tax?
Which areas represent the revenues collected by the government from the tax?
Would this tax on soft drinks be considered efficient?
Yes, because it imposes a small excess burden (deadweight loss) relative to the tax revenue it raises.
The figure to the right represents the market for pecans. Assume that this is a competitive market. At a quantity of 4,000 pounds,
the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.
Marginal cost is
the additional cost of producing one more unit
Why is the supply curve referred to as a marginal cost curve?
It shows the willingness of firms to supply a product at different prices
Producer surplus is
the difference between the lowest price a firm would be willing to accept and the price it actually receives.
How does producer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, producer surplus----, and as the price of a good falls, producer surplus---
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
How does consumer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, consumer surplus----, and as the price of a good falls, consumer surplus-----
If the market is initially in equilibrium, as shown by the graph on the left, the consumer surplus is given by-----and the producer surplus is given by ----
Now suppose that the price, Upper P 1, is imposed on this market as shown by the graph on the right. In this case, the new consumer surplus is given by ----
and the new producer surplus is given by----
A deadweight loss resulting from the imposition of price Upper P1 is given by
Tax incidence indicates
the actual division of the burden of a tax.
Do the people who are legally required to pay a tax always bear the burden of the tax? Briefly explain.
No. Whoever bears the burden of the tax is not affected by who legally is required to pay the tax to the government.
Why would economists use the term deadweight loss to describe the impact on consumer and producer surplus from a price control?
Deadweight loss measures the amount of surplus
that is lost, being transferred to noone, as a result of a price control.
Why do some consumers tend to favor price controls while others tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
Marginal benefit is
the additional benefit from consuming one more unit.
Why is the demand curve referred to as a marginal benefit curve?
It shows the willingness of consumers to purchase a product at different prices.
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Essentials of Investments
Krugman's Economics for AP*
David Anderson, Margaret Ray
Principles of Microeconomics
N. Gregory Mankiw
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