Test 2 - Test 2 Ch. 7: Surplus and Taxes 22:00 Efficiency...

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Unformatted text preview: Test 2 Ch. 7: Surplus and Taxes 22:00 Efficiency • When the Qs or the Qd is not equal, a shortage or surplus will result. • When equal, more units are actually consumed, and are sold at Pe (equilibrium price). • Both Consumers and producers enjoy benefit by trading at this price. • Because these units sell at a price both greater than the producer’s minimum, and less than the consumer’s maximum, both the consumer and the producer achieve a benefit. • The difference is referred to as a Surplus • Consumer’s Surplus : The difference between the Maximum buying price and the price actually paid. • Producer’s Surplus : The difference between the price actually received and the minimum selling price. • Total Surplus : The combined surplus gained by both the consumer and the producer. o Conceptually, economists consider this a surplus because the Consumer buys units for less than what they were willing to pay, and producers receive a price greater than what they were willing to receive. o Ex. I would have paid up to 20$ for a large pizza. But because the market set an equilibrium price of 14$, I saved 6$. This savings represents the surplus gained. o The combined total of the consumer and producer surplus is the “economic surplus”. o The economic surplus is maximized at equilibrium. • Deadweight loss is the surplus forfeited when the market is not in equilibrium. (always a triangle on a graph) o When the market price occurs where Qd does not equal Qs, deadweight loss will occur. • Economic Efficiency occurs when marginal benefits of consumption equal marginal costs of production at the last unit consumed. At this point, total surplus is maximized. Taxes • Government may place a tax on either a producer or consumer, but the laws of supply and demand determines who actually pays. • Who pays the tax is actually determined by how responsive both the consumer and supplier are to changes in price • If buyers and sellers are equally responsive, they may split the tax, regardless upon who it is actually placed. • Those who are perfectly inelastic in either demand or supply pay the full tax, absorbing it from the other. • Those who are perfectly elastic in either demand or supply pay no tax, shifting it to the other. • The more elastic the demand, the smaller the percentage of the tax will be paid for by the buyer. Ch. 9: Production and Costs 22:00 The Firm’s Objective: Maximizing Profit • A firm engages in business activity with the objective of attaining…(see what he said here) • Businesses failing to understand this prime objective will soon be failing-...
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This note was uploaded on 12/09/2009 for the course ECON 2030 taught by Professor Bong during the Spring '07 term at LSU.

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Test 2 - Test 2 Ch. 7: Surplus and Taxes 22:00 Efficiency...

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