Economic Surplus and Deadweight Loss
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Economic Surplus and Deadweight Loss

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Questions and Answers

What does economic surplus represent in the market?

  • The total revenue generated by producers.
  • The lost value when market demand exceeds supply.
  • The profit earned by firms after costs.
  • The total value of consumer and producer surplus for each quantity exchanged. (correct)
  • Which of the following situations contributes to deadweight loss resulting from underproduction?

  • An increase in consumer demand.
  • A price floor above the equilibrium price. (correct)
  • A market operating at competitive equilibrium.
  • A price ceiling set below the equilibrium price. (correct)
  • If consumers pay $14/unit and producers receive $8/unit after a tax is applied, how much tax revenue is generated per unit?

  • $14
  • $8
  • $6 (correct)
  • $22
  • What is the correct formula for calculating deadweight loss due to a subsidy?

    <p>(36 - 22) * (140 - 100) / 2</p> Signup and view all the answers

    What defines productive efficiency in the context of economics?

    <p>Producing at the lowest average total cost.</p> Signup and view all the answers

    How is economic surplus affected when a subsidy is introduced?

    <p>Economic surplus decreases by the amount of the subsidy.</p> Signup and view all the answers

    What is the essence of allocative efficiency?

    <p>Equal marginal cost and marginal benefit.</p> Signup and view all the answers

    What happens to economic surplus when a tax is imposed?

    <p>It decreases due to deadweight loss and tax revenue.</p> Signup and view all the answers

    Study Notes

    Economic Surplus

    • The combined total of consumer, producer, and economic surplus for all quantities exchanged.

    Deadweight Loss

    • The value of economic surplus lost when the market is not at competitive equilibrium.
    • Can be caused by underproduction or overproduction.
    • Occurs due to factors like price controls (floors and ceilings), taxes, and subsidies.

    Deadweight Loss: Price Controls

    • Price floor at 100:
      • Consumer surplus: Area A.
      • Producer surplus: Area B + C + D.
      • Deadweight loss: Area E + F.
    • Price ceiling at 40:
      • Consumer surplus: Area A + B + C
      • Producer surplus: Area D
      • Deadweight loss: Area E + F

    Deadweight Loss: Tax

    • Consumers pay $14 per unit to producers.
    • Producers pay $6 per unit to the government.
    • Producers receive $8 per unit.
    • Consumer surplus: (20-14)*30/2
    • Producer surplus: (8-5)*30/2
    • Tax revenue: 6*30
    • Deadweight loss: 6*(50-30)/2
    • Economic surplus: CS + PS + Tax Revenue.
    • Tax revenue comes from producer and/or consumer surplus.

    Deadweight Loss: Subsidy

    • Consumers pay $22 per unit to producers.
    • Producers receive $14 per unit from the government.
    • Producers actually receive $36 per unit.
    • Deadweight loss: (36-22)*(140-100)/2.
    • Consumer surplus: Area below demand curve, above the $22 price level.
    • Producer surplus: Below the $36 price level, above the supply curve.
    • Subsidy: 14*140
    • Deadweight loss: 14*(140-100)/2.
    • Economic surplus: CS + PS - Subsidy.
    • Subsidies are considered negative taxes and come from economic surplus from other markets.

    Productive Efficiency vs. Allocative Efficiency

    • Productive efficiency is achieved when production occurs at the lowest average total cost. This is represented by points on the Production Possibilities Frontier (PPF).
    • Allocative efficiency is achieved when marginal benefit equals marginal cost (MB=MC). This is represented by the competitive equilibrium level of production.

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    Description

    This quiz covers the concepts of economic surplus and deadweight loss, including how both are affected by market conditions such as price controls and taxation. Participants will explore consumer and producer surplus along with the implications of different economic scenarios. Test your understanding of these crucial economic principles!

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