Principles of Microeconomics Chapter 7 PDF

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