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GECON200

Terms in this set (20)

buyer's surplus
difference between the buyer's reservation price and the price he/she actually pays
seller's surplus
difference between the price received by the seller and his/her reservation price
total surplus
difference between the buyer's reservation price and the seller's reservation price
consumer surplus
difference between the highest price a consumer is willing to pay for a good or service & the price the consumer actually pays
marginal benefit
additional benefit to a consumer from consuming one more unit of a good or service

marginal benefit = marginal cost only at competitive equilibrium
producer surplus
difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
marginal cost
additional cost to a firm of producing one more unit of a good or service
consumer surplus means
-measures the net benefit to consumers from participating in a market rather than the total benefit
-c.s. in a market is equal to the total benefit received by consumers minus the total amount they pay to buy the good or service
producer surplus means
-measures the net benefit received by producers from participating in a market
-p.s. in a market is equal to the total amount firms receive from consumers minus the cost of producing the good or service
economic surplus
the sum of consumer surplus and producer surplus

economic surplus = consumer surplus + producer surplus
deadweight loss
reduction in economic surplus resulting from a market not being in competitive equilibrium

when a market is not in equilibrium, there is deadweight loss
economic efficiency
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
price ceiling
legally determined maximum price that sellers may charge
price floor
legally determined minimum price that sellers may receive
when govt imposes price floors/ceilings 3 things happen:
-some people win
-some people lose
-there is a loss of economic efficiency
tax incidence
-actual division of the burden of a tax between buyers and sellers in a market
-taxes provide the revenue that the govt uses to provide goods like national defense, health care for the old/poor, + other public goods

-goal of taxation is to raise revenues which create the least distortion possible
-second goal is to correct for market failures
supply and demand equations
q^demand = q^supply
why do some consumers tend to favor price controls while others tend to oppose them?
price ceilings generate shortages. consumers who obtain the product at a lower price win, but consumers who would like to purchase the product but are unable to lose.
do producers tend to favor price floors/ceilings? why?
price floors because when binding they increase price above the equilibrium and may increase producer surplus
a black market is and may arise when?
-a market in which buying and selling occur at prices that violate govt price regulations
-in reaction to binding price ceilings
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