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What does Equilibrium do?
maximizes the combination of consumer surplus and producer surplus.
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Compair consumer surplus to producer surplus
consumer surplus is the net benefit a consumer gets from purchasing a good while producer surplus is the net benefit a producer gets from selling a good
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What does government taxes do?
firms and inviduals in order to carry out its six roles in a market economy.
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when will a government maximize benefits to society
only if it chooses to tax when the marginal benefit of the goods and services provided with the revenue of the tax exceeds the cost of the tax
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taxes create...
a loss of consumer and producer surplus known as dead weight loss, which graphically is represented by the welfare loss triangle
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the cost of taxation to consumers and producers includes..
the actual tax paid, the deadweight loss, and the cost of administering the tax
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who bears the burden of the tax depends on what?
the relative elasticities of demand and suupply. the more inelastic one's relative supply and demand, the larger the burden of the tax one will bear
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price ceilings and price floors, like taxies...
result in loss of consumer and producer surplus
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price ceilings transfer producer surplus to consumers and therfore...
are equivalent to a tax on producers and a subsidy to consumers.
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price floors have the opposite effect of cealings they...
are a tax on consumers and a subsidy to producers
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rent-seeking activiteis are designed...
to transfer surplus from one group to another. producers facing inelastic demand for their product will benefit more from rent seeking activties than producers facing elastic demand
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consumers facing inelastic supply for a product benefit more from rent seeking activites such as...
lobbying for price ceilings than consumers facing an elastic supply.
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the more elastic supply and/or demand is...
the greater the surplus is with an effective price floor and the greater the shortage is with an effective price ceiling
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the general rule of political economy is..
that policies tend to reflect a small groups' interst, not the interests of large groups
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the negative aspects of price controls worsen as the..
length of time considered rises because elastcity rises as time progresses.
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consumer surplus
the value the consumer getsf rom buying a product less than its price
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producer surplus
the price the producer sells a product for less the cost of producing it, represented by the area above the supply curve but below the price the producer recieves
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how to figure out the area of a triangel
area of a triangle is 1/2(base X height)
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for streight-line ddemand cureves the amought of surplus can be determiend by
calculating the area of the relevant triangle or retangle
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deadweight loss
the loss of consumer and producer surplus from a tax, shown graphically by the welfare loss triangle
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welfare loss triangle
a geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply/demand equlibrium
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excise tax
a tax levied on a specific good
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formula for faction for tax borne by demander
Es/Ed+Es
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formula for faction of tax borne by supplier
Ed/Ed+Es
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price ceiling
is a government set price below the market equilibrium price
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price floors
government set prices above equilibruim price
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public choice economists
economists who integrate an economic analysis of politics with their analysis of the economy
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general rule of political economy
when small groups are helped by a government action and large groups are hurt by that same action, the ssmall group tends to lobby far more effective than the large group; thus, policies tend to reflect the small group's interest, not the einterest of the large group
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