Principles of Microeconomics Chapter 7 PDF

Summary

This document is a lecture on Chapter 7 of 'Principles of Microeconomics' by Shuo Xu, delivered on October 17, 2024. It covers topics including economic surplus, deadweight loss (from price controls and taxes), and the difference between productive and allocative efficiency.

Full Transcript

Principles of Microeconomics Chapter 7 Shuo Xu October 17, 2024 1/9 Economic Surplus I Market (Consumer/Producer/Economic) Surplus is the sum of the (Consumer/Producer/Economic) Surplus of each quantity exchanged....

Principles of Microeconomics Chapter 7 Shuo Xu October 17, 2024 1/9 Economic Surplus I Market (Consumer/Producer/Economic) Surplus is the sum of the (Consumer/Producer/Economic) Surplus of each quantity exchanged. 2/9 Deadweight Loss: Definition Deadweight Loss is the value of economic surplus forgone when the market is not adjusted to its competitive equilibrium. I Underproduction: Price Floor/Ceiling, and Tax. I Overproduction: Subsidy. 3/9 Deadweight Loss: Price Controls When price floor is at 100: I CS: A. PS: B+C+D. DWL: E+F. When price ceiling is at 40: I CS: A+B+C. PS: D. DWL: E+F. 4/9 Deadweight Loss: Tax I Consumer pay $14/unit to Producers. I Producers pay $6/unit to Government. I Producers actually receive $8/unit. 5/9 Deadweight Loss: Tax I CS: (20-14)*30/2 I PS: (8-5)*30/2 I Tax Revenue: 6*30 I DWL: 6*(50-30)/2 I Economic Surplus = CS+PS+Tax Revenue I Tax Revenue is part of Economic Surplus. Tax Revenue comes from producer and/or consumer surplus. 6/9 Deadweight Loss: Subsidy I Consumer pay $22/unit to Producers. I Producers receive $14/unit from Government. I Producers actually receive $36/unit. I Deadweight Loss: (36-22)*(140-100)/2 7/9 Deadweight Loss: Subsidy I CS: Below the demand curve, above the 22 price level. I PS: Below the 36 price level, Above S1. I Subsidy: 14*140 I DWL: 14*(140-100)/2 I DWL is the area of the triangle to the right of the equilibrium (30,100). I Economic Surplus = CS+PS-Subsidy I Subsidy is negative tax. Subsidy comes from economic surplus in the market for another good. 8/9 Productive Efficiency vs. Allocative Efficiency I Productive Efficiency: Smallest average total cost of production. For example, bundles on PPF. I Allocative Efficiency: MB=MC. For example, competitive equilibrium level of production. 9/9

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