Chapter 4

Last updated Sep 12, 2023 Edit Source

Efficiency is producing the goods that society wants at the lowest possible price.

Difference between what a consumer is prepared to pay and what they actually pay in the market.

The extra opportunity cost of buying one more unit of a good or service

Difference between what a producer is willing to receive and what they actually receive in a market.

The extra opportunity cost of producing one more unit of a good or service

Total surplus = CS + PS

It is a measure of the net benefits to society from the production consumption of the good.

Loss in total surplus that is avoidable.

Is the highest price that a producer can charge on a good.

• It is usually below the equilibrium price
• Intended to keep prices affordable for majority of the population

• Need for rationing process to regulate demand
• Could lead to black markets

Is the minimum price that a producer can charge on a good

• It is usually above the equilibrium price
• Designed to ensure that there is a minimum income received by producers

• Informal illegal markets could result

1. Original price and quantity
2. Implement price floor/ceiling (say above or below equilibrium)
3. New price and quantity
4. Quantity demanded/supplied comparison - Shortage/Surplus
5. Consumer, producer surplus + dead weight loss (use letters, A, B, C, etc)
6. Loss in efficiency

The original

• E.g. Income tax

• Consumers do not pay the tax directly, but are affected through changes in the price of the good or service

Specific tax:

• The tax is a fixed amount or is a set sum of money per unit Something else

• Can aid in the redistribution of income
• To correct externalities
• To earn revenue

• Reduces quantity while increasing price
• Tax incidence depends on the elasticity of the good/service
• Creates a dead weight loss

1. Original P/Qty
2. Implement gov policy
3. New Price/Quantity
4. Tax revenue
5. CS, PS, TS, DWL
6. Conclusion on efficiency