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Unformatted text preview: Chapter 6 I. Control on Prices a. price ceiling sets legal maximum price - not binding when set above / binding when set below equilibrium price - not binding means market can freely return to eq. price, while binding means market cannot return to eq. price b. price floor sets legal minimum price - not binding when set below / binding when set above equilibrium price c. Problems - price controls often hurts who theyre trying to help (poor) - examples: minimum wage (hurts those who become unemployed b/c of minimum wage) and rent controls (reduces quality and availability of housing) II. Taxes- tax wedge : difference b/w what the buyer pays and what the seller receives- tax incident : how the burden of a tax is shared among participants in a market- reduces quantity- burden shared with buyer and seller- burden of tax determined by the elasticity of the S & D curves Chapter 7- Welfare Economics : study of how the allocation of resources affects economic well-being I. Consumer Surplus- measures the benefits received by buyers- willingness to pay : maximum price a buyer will pay- consumer surplus : amount buyer is willing to pay minus the amount they actually pay, its also the area below the demand curve and above the price CS = Willingness - Price II. Producer Surplus- measures the benefits received by sellers- cost : what the seller has to give up to produce a good (like opportunity costs)- producer surplus : amount seller is paid for a good minus sellers cost, its also the area above the supply curve and below the price PS = Price Cost III. Market Efficiency- measured by total surplus (CS + PS), which is the area below the demand curve and above the supply curve- efficiency : the property of a resource allocation of maximizing the total surplus received by all members of society- free market eq. is efficient b/c it maximizes total surplus- equity : the fairness of the distribution of well-being among the members of society- market failure : when a market cannot allocate resource efficiently Chapter 8- Taxes raise the price buyers pay, reduce the price sellers receive and reduce quantity exchanged I. Deadweight Loss of Taxation- deadweight loss : the reduction in total surplus that results from a tax- caused b/c taxes prevent buyers and sellers from realizing some of the gains from trade- tax wedge : the difference b/w what the buyers pay and what the sellers receive when a tax is implemented II. Determinants of Deadweight Loss- the more elastic demand and supply is, the bigger the deadweight loss...
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This note was uploaded on 04/10/2008 for the course ECON 100 taught by Professor Tenerelli during the Fall '06 term at Ill. Wesleyan.
- Fall '06