Chapter 4 notes - Chapter 4 Notes Economic Efficiency...

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Chapter 4 January 30, 2006 Notes Economic Efficiency, Government Price Setting, and Taxes Price Ceiling : a legally determined maximum price that sellers may charge. o Example: Rent control. Price Floor : a legally determined minimum price that sellers must received. Consumer Surplus and Producer Surplus Consumer surplus measures the dollar benefit consumers receive from buying goods or services in a particular market. Producer surplus measures the dollar benefit firms receive from selling goods or services in a particular market. Economic surplus in a market is the sum of the consumer surplus and producer surplus. When the government imposes a price ceiling or price floor, the amount of economic surplus in a market is reduced. Consumer Surplus Marginal Benefit : the additional benefit to a consumer from consuming one more unit of a good or service. Consumer Surplus : the difference between the highest prices a consumer is willing to pay and the price the consumer actually pays. o The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price. o The demand curve shows the consumer’s willingness to purchase a product at various prices which also shows the marginal benefit. Consumer Surplus from Satellite Television Producer Surplus Supply curves show the willingness of firms to supply a product at different prices. Marginal Cost : the additional cost to a firm of producing one more unit of a good or service. Producer Surplus : the difference between the lowest price a firm would have been willing to accept and the price it actually receives. The total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price. What Consumer Surplus and Producer Surplus Measure Consumer surplus is measuring the net benefit to consumers from participating in a market, rather than the total benefit. That is, if the price of a product were zero, then the consumer surplus in a market would be all of the area under the demand curve.
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