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Chapter_4_Notes

# Chapter_4_Notes - Chapter 4 Notes Chapter 4 Economic...

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Chapter 4 Notes Chapter 4 Economic Efficiency, Government Price Setting, and Taxes Chapter 3 reviewed the basic concepts of supply and demand that were covered in Micro. Chapter 4 continues reviewing by examining concepts such as economic surplus and the effects of government price setting (either through ceilings/floors or taxes). Consumer Surplus (CS) and Producer Surplus (PS) Consumer surplus measures the net dollar benefit consumers receive from buying goods or services in a particular market. It is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays. Since demand curves show the quantities of a good demanded at different prices, we can use the demand curve to measure the total consumer surplus in the market. Marginal benefit is the additional benefit to a consumer from consuming one more unit of a good. Consumers are willing to purchase up to a point where the marginal benefit equals the price. So the demand curve shows the marginal benefit to consumers. What if MB of a good is \$6? Would you buy it for: \$3 → yes, \$6 → yes, \$7 → no CS illustrated: 1

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Chapter 4 Notes Producer surplus measures the net dollar benefit firms receive from selling goods or services in a particular market. Similar to consumers who only purchase up to a point where the marginal benefit equals the price, suppliers will supply an additional unit of a product on if they receive a price equal to the marginal cost. Marginal cost is the additional cost of producing one more unit of a good. Producing one more unit of a good will often cause the marginal cost to rise (reflected in the upward sloping supply curve). The marginal cost of each unit of a good is the lowest price a firm is will accept for that unit. So the supply curve shows the marginal costs to firms. PS illustrated: 2
Chapter 4 Notes Remember CS and PS are net benefits for the consumer and supplier, respectively. CS in a market is equal to the total benefit received by consumers minus the total amount they must pay to buy the good. PS in a market is equal to the total amount firms receive from consumers minus the cost of producing the good. 3

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Chapter 4 Notes The Efficiency of Competitive Markets A competitive market is a market with many buyers and sellers. Simple supply and demand models show that a competitive market leads to efficient economic outcomes. There are two ways to think about what economic efficiency is within the context of competitive markets. 1.
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Chapter_4_Notes - Chapter 4 Notes Chapter 4 Economic...

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