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Questions and Answers
What is the economic surplus when the market is at its competitive equilibrium?
What happens to economic surplus when a price floor is introduced?
What does deadweight loss represent in a market?
When tax is implemented, which of the following is true about producer receipts?
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How is deadweight loss calculated in the case of a subsidy?
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What defines productive efficiency in a market?
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Which of the following represents allocative efficiency?
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What is the impact of a tax on economic surplus?
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Study Notes
Economic Surplus
- Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay
- Producer surplus is the difference between the minimum price a producer is willing to accept for a good and the actual price they receive
- Market surplus is the sum of consumer and producer surplus for all units exchanged
- Market surplus is maximized at competitive equilibrium
Deadweight Loss
- Deadweight loss is the value of economic surplus forgone when the market is not at competitive equilibrium
- Deadweight loss represents inefficiency
- Underproduction or Overproduction can cause deadweight loss
Deadweight Loss: Price Controls
- Price floors create deadweight loss by reducing the quantity exchanged below the competitive equilibrium level
- Price ceilings create deadweight loss by reducing the quantity exchanged below the competitive equilibrium level
Deadweight Loss: Tax
- Taxes create deadweight loss by reducing the quantity exchanged below the competitive equilibrium level
- Taxes are part of economic surplus, and reduce consumer and producer surplus
- Government revenue from taxes comes from consumer and producer surplus
Deadweight Loss: Subsidy
- Subsidies create deadweight loss by increasing the quantity exchanged above the competitive equilibrium level
- Subsidies are negative taxes
- Subsidies come from economic surplus in other markets
- Subsidies are part of economic surplus, and reduce consumer and producer surplus
Productive Efficiency vs. Allocative Efficiency
- Productive efficiency is achieved when producers create goods and services at the lowest possible average total cost
- Allocative efficiency is achieved when the marginal benefit of a good equals its marginal cost
- Allocative efficiency occurs at competitive equilibrium
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Description
This quiz covers the concepts of economic surplus, including consumer and producer surplus, as well as the implications of deadweight loss in various market conditions. You will explore how price controls and taxes can affect market efficiency and equilibrium. Test your understanding of these fundamental economic principles.
