Chapter 4

Chapter 4 - Chapter 4- Economic Efficiency, Government...

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Chapter 4- Economic Efficiency, Government Price Setting, and Taxes Price ceiling- a legally determined maximum price that sellers may charge o Ex. rent control Price floor- a legally determined minimum price that sellers may receive o Ex. farm products such as milk Economists have developed the concepts of consumer surplus, produce surplus, and economic surplus to analyze the economic effects of price ceilings, price floors, and taxes Consumer Surplus and Producer Surplus Consumer surplus measures to 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 consumer surplus plus producer surplus When the government imposes a price ceiling or a price floor, the amount of economic surplus in a market is reduced Price ceilings and price floors reduce the total benefit to consumers and firms from buying and selling in a market Consumer Surplus Consumer surplus- the difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays Demand curves show the willingness of consumers to purchase a produce at different prices Consumers are willing to purchase a product up to the point where the marginal benefit to consuming a product is equal to its price Marginal benefit- the additional benefit to a consumer from consuming one more unit of a good or service The total amount of consumer surplus in a market is equal to the area below the demand curve and above the market price Produce Surplus Supply curve shows the willingness of firms to supply a product at different prices Firms will supply an additional unit of a product only if they receive a price equal to the additional cost of producing that unit Marginal cost- the additional cost to a firm of producing one more unit of a good or service The marginal cost of producing a good increases as more of the good is produced during
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This note was uploaded on 02/21/2012 for the course EC 101 taught by Professor Idson during the Fall '08 term at BU.

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Chapter 4 - Chapter 4- Economic Efficiency, Government...

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