Microeconomics Exam2
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| Consumer surplus | Buyers’ willingness to pay for a good minus the amount they actually pay
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| Consumer surplus measures | The benefit buyers get from participating in a market
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| Consumer surplus can be computed by | Finding the area below the demand curve and
above the price.
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| Producer surplus | The amount sellers receive for their goods minus their costs of
production
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| Producer surplus measures | The benefit sellers get from participating in a market
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| Producer surplus can be computed by | the area below the price and above the supply curve
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| Total surplus | The sum of consumer and producer surplus
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| What maximizes total surplus? | The equilibrium of supply and demand
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| Willingness to pay | the maximum amount that a buyer will pay for a good
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| Cost | the value of everything a seller must give up to produce a good
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| A price ceiling is | A legal maximum on the price of a good or service.
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| If the price ceiling is below the equilibrium price, then the price is | binding
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| When the price ceiling is binding | the quantity demanded exceeds the quantity supplied
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| A price floor is a | legal minimum on the price of a good or service.
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| If the price floor is above the equilibrium price, then the price is | binding
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| When the price floor is binding | the quantity supplied exceeds the quantity demanded
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| When the government levies a tax on a good, the equilibrium quantity of the good | Falls
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| A tax on a good places a wedge between | the price paid by buyers and the price received by sellers
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| When the market moves to the new equilibrium | buyers pay more for the good and sellers receive less for it.
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| The incidence of a tax depends on | the price elasticities of supply and demand
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| tax incidence | the manner in which the burden of a tax is shared among participants in a market
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| How Taxes on Sellers Affect Market Outcomes | -The supply curve will shift left by the exact amount of the tax
-The quantity of the good sold will decline.
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| Lessons on taxes | 1. Taxes discourage market activity.
2. Buyers and sellers share the burden of a tax
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| How Taxes on Buyers Affect Market Outcomes | -The demand curve will shift left by the exact amount of the tax
-Decrease in demand
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| When supply is elastic and demand is inelastic | the largest share of the tax burden falls on consumers
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| When supply is inelastic and demand is elastic | the largest share of the tax burden falls on producers
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| In general, a tax burden falls more heavily on the side of the market that is | less elastic
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| A small elasticity of demand means | buyers do not have good alternatives to consuming this product
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| small elasticity of supply means | sellers do not have good alternatives to producing this particular good
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