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Eco 110: Weeks 5-7

by: Frankie Bjork

Eco 110: Weeks 5-7 ECO 110

Frankie Bjork
UW - L

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About this Document

These are all the notes given from chapters five thru seven.
Microeco & Pub Pol
Amena Khandker
Eco 110, Microeconomics, Microecon, Public Policy
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This 3 page Bundle was uploaded by Frankie Bjork on Saturday March 19, 2016. The Bundle belongs to ECO 110 at University of Wisconsin - La Crosse taught by Amena Khandker in Spring 2016. Since its upload, it has received 29 views. For similar materials see Microeco & Pub Pol in Economcs at University of Wisconsin - La Crosse.


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Date Created: 03/19/16
Eco 110: 3/1-3/10 Chapter Seven Welfare Economics  Welfare economics: study of how the allocation of resources affects economic well-being.  Consumer Surplus o A buyer’s willingness to pay for a good minus the amount actually paid o Willingness to pay: the maximum amount that a buyer will pay for a good  Measures how much the buyer values the good or service o What happens to an individual’s consumer surplus when…  Price increases: surplus ↑  Price decreases: surplus ↓  Consumer Surplus and the Demand Curve o The area below the demand curve and above the price measures total consumer surplus in the market  Producer Surplus o The difference between the lowest price a firm would be willing to accept for a good and the price they receive o Measures the benefit to sellers participating in a market o What happens to an individual firm’s producer surplus when…  Price increases: surplus ↑  Price decreases: surplus ↓  Producer Surplus and the Supply Curve o The area below the price and above the supply curve measures the producer surplus in a market  Total Surplus (aka Total Welfare) o Consumer Surplus + Producer Surplus  Free Market Outcome o Efficiency: resource allocated that maximizes total surplus  Efficiency is generated in most free markets  Note that efficiency is not the same thing as equality  Price Ceiling and Welfare o A price ceiling reallocates some surplus from producers to consumers o Creates deadweight loss: a reduction in total surplus  Price Floor and Welfare o Price floors reallocate some surplus from consumers to producers Chapter Eight Application: The Costs of Taxation  The deadweight loss of taxation: the fall in total surplus that results from a market distortion, such as tax  Effect of tax on market participant o Welfare without tax o Welfare with tax o Changes in welfare  The determinants of deadweight loss o The greater the elasticities of supply and demand, the greater the deadweight loss of a tax. o Larger tax rate distorts incentive more and its deadweight loss grows larger.


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