ECON 202 1nd Edition Lecture 15 Outline of Last Lecture I. Efficiency of Marketsa. Consumer Surplusb. Producer Surplusc. Total SurplusOutline of Current Lecture II. Efficiency of Marketsa. Total Surplusi. Price Floorb. Economic Impact of TaxesCurrent LectureEfficiency of MarketsTotal Surplus – the combination of consumer and producer surplus- Measures social welfare (society’s happiness)Example: A competitive market will result in Q*Q* is the optimum amount because it will maximize total surplusTotal Surplus = the Area of Δ ABCThe Efficiency of Competitive Equilibrium or Market Equilibrium- In competitive equilibrium marginal benefit = marginal costAt Q*, marginal benefit = marginal cost which is the efficient use of resourcesAt a point to the left of Q*, marginal benefit is greater than marginal cost which means producing more can make society better ofAt a point to the right of Q*, marginal benefit is less than marginal cost which means producing less can make society better ofThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. SDBQ*P*ACPPSCSIn other words at Q* total surplus is maximizedLost surplus = deadweight lostWhen the quantity is greater than Q* you have to subtract the deadweight lost from the area ofthe Δ on the leftExample: Price FloorWithout Price Floor With Price FloorPrice P* PFQuantity Q* Q2Consumer Surplus A+B+C AProducer Surplus E+F+G B+E+GTotal Surplus A+B+C+E+F+G A+B+E+GDeadweight Lost 0 C+FProducers could be either better or worse of, depending on if B is larger or smaller than F.Price Floors are bad because there is a Deadweight Lost (DWL)Competitive Markets are efficient unless price controls or taxes are involvedEconomic Impact of Taxes – taxes reduce consumer surplus and producer surplusExcise Tax (tax per unit of out put) – examples: gasoline tax is 56.8 ¢ per gallon of gas, and cigarette tax is $2.42 per pack of cigarettes in TexasExample: Suppose there is a $1 excise tax collected from sellersPB is the price the buyers payPS is the price the sellers collectPB – PS = the tax on the goodIf the tax is collected from sellers:- Supply decreases- The price the buy pays increasesfrom P* to PBPFSDBQ*P*ACPQ2EFGS1S2DQQ*Q2P*PBPS- The price the supplier collectsfalls from P* to PS- The quantity falls from Q* to Q2If the tax is collected from the buyer:- Demand decreases- price the buyer pays increasesfrom P* to PB- Price the seller collectsdecreases from P* to PS- Quantity falls from Q* to Q2Tax Incidence – who bears the burden ofthe tax- Can businesses pass on the burden of taxes to consumers in the form of higher prices?o Depends on
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