4 the incidence of consumer and producer surplus a in

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4. THE INCIDENCE OF CONSUMER AND PRODUCER SURPLUS a. In theory, if the price elasticity of demand is equal to -1 and the price elasticity of supply is equal to 1, the consumer surplus and producer surplus would be the same. However, likely, the price elasticity of demand and price elasticity of supply will not equal -1 and 1, respectively. b. It is critical to understand that a change in the P.E.D. and P.E.S. influences the producer and consumer surplus size, as shown in Figure 3. 22 | P a g e
c. If a good or service has inelastic demand and elastic supply, most of the surplus will fall on the consumer. This is beneficial for the consumer because although they are willing to pay a lot more for good (P2), they pay much less for good (Pe); therefore, the consumer's welfare gain is high. 23 | P a g e
d. If a good or service has elastic demand and inelastic supply, most of the surplus will fall on the producer. This is beneficial for the producer because although they are willing to supply goods for a lot less (P1), they sell them for much more (Pe). Therefore the welfare gain for the producer is high. e. Overall, consumer and producer surplus shows the welfare gained by the consumer and producers. However, the amount of welfare gained from selling/purchasing a good can vary due to the P.E.D. and P.E.S. of the good. 24 | P a g e
Production, Entry, and Exit Figure 3.1 What factors determined the driver’s entry and exit into the market? Use economic models to support your analysis.
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2. In a competitive market, profits are a red cape that incites businesses to charge. If a business is making a profit in the short run, it has an incentive to expand existing factories or to build new ones. New firms may start production, as well. When new firms enter the industry in response to increased industry profits, it is called entry. 3. Losses are the black thundercloud that causes businesses to flee. If a business is making losses in the short run, it will either keep limping along or just shut down, depending on whether its revenues cover its variable costs. Nevertheless, in the long run, firms facing losses will shut down at least some of their output, and some firms will cease production altogether. The long-run process of reducing production in response to a sustained pattern of losses is called exit. The following Clear It Up feature discusses where some of these losses might come from and the reasons why some firms go out of business.

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