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Economics Module 6 Notes Module 6 2 Total Economic Surplus Market E ciency How to Measure It Why it Matters Economic Surplus Consumer Surplus Producer Surplus Economic surplus AKA Social surplus AKA Total surplus Under many circumstances at equilibrium economic surplus is maximized and we say that the market is e cient Economic Surplus is the sum of consumer surplus and producer surplus It is larger at the equilibrium quantity and price than it will be at any other quantity and price under most circumstances Market e ciency is when resource allocation maximizes total economic surplus This happens at market equilibrium under most circumstances Module 6 3 Explicit Implicit Costs and Accounting Economic Pro t Explicit costs are out of pocket costs that is actual payments Implicit costs are any cost associated with not taking a certain action They exist without the exchange of cash and are not recorded for accounting purposes Accounting pro t is a cash concept It means total revenue minus explicit costs It is the di erence between dollars brought in and dollars paid out Economic pro t is total revenue minus total cost including both explicit and implicit costs Economic pro t revenues explicit costs opportunity costs Module 6 4 Types of Market Failure When the market fails it will not produce or consume a socially optimal quantity of the good it will be over or under produced consumed Market Failure is a situation where free markets fail to allocate resources e ciently The market will fail by not supplying the socially optimal amount of the good Externalities occur when a third party is a ected either positive or negative by the decisions and actions of others Public good is a good that is both non excludable and non rivalrous in that individuals cannot be e ectively excluded from use non excludable and where use by one individual does not reduce availability to others non rivalrous Monopoly Power occurs when a rm controls the market with high market share and can set higher prices Free Riders People who bene t without paying Public Good Anything having the characteristic of non exclusion and non rivalry Non exclusion The idea that you can not exclude people that don t pay Ex you can t limit the bene ts of national defense for the people who don t pay taxes for others Non rivalry the idea that one person s consumption of the goods don t ruin it Tragedy of the commons the idea of the common goods that everyone has access to are often misused and exploited


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