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Miami University Hamilton - CMR 111 - Class Notes - Week 8

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Miami University Hamilton - CMR 111 - Class Notes - Week 8

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background image Chapter 5: Market Outcomes and Tax Incidence Consumer Surplus: Difference between a good’s price and the consumer’s 
willingness to pay for it
→ Willingness to pay = Maximum price a consumer will pay Producer Surplus: Difference between the price a seller wishes to sell their 
product for and the price that they receive for it
→ Willingness to sell = Minimum price a seller will accept for their
Total surplus (social welfare): Sum of consumer surplus and producer surplus Measures the wellbeing of a market without government intervention Efficiency & Equity Efficiency: A market’s allocation of resources maximizes the total surplus Equity: The fairness of the distribution of benefits among a society Self­interest helps drive purchases, and it is assumed that market 
participants are rational decision makers
Consumers act in the interest of consumer surplus and producers 
act in the interest of producer surplus
Everyone wants to benefit from an exchange and get the 
best deal that they can
Tax Incidence Incidence: The burden of taxation that is placed on whoever pays the tax 
through higher prices, regardless of whoever the tax is actually placed on
Division of the tax burden between buyers and sellers Example:  ● The government places a $1 tax on milk → Consumer must be  willing to pay the price of the milk PLUS the extra $1 in tax Consumer’s willingness to pay for the milk will go down and demand will 
decrease because the consumer will have to pay more for the milk, once
tax is included
Overall, the amount of milk purchased will decrease Economists look into the ways that taxes affect purchases Taxes cause prices to rise and may affect how much of a good/service is 
Excise taxes: Taxes levied on a particular good/service Deadweight Loss: Decrease in economic activity caused by market distortions Goods/services with inelastic demand (water, electricity, etc.) are often 
People need these no matter the price, so taxation does not affect 
the demand for them.
background image Goods/services with elastic demand, like milk, are affected more by 
Chapter 6: Price Controls Price Controls: The government intervenes in the market to set prices Price ceiling: Legal maximum price for a good/service Inflation causes prices to keep rising. People with low incomes may not be able to afford items because of the 
rising prices.
A price ceiling can ensure that people can still afford items they need. However…. It can cause issues May cause production to decrease because goods with a price 
ceiling have less room to make a profit
Producers will look to cut their costs to stay profitable Make the product smaller Decrease the quality of the product Stop making fancier versions of the product Non­binding price ceilings: The price ceiling is above equilibrium 
price, so supply and demand still regulate price
Binding price ceilings: The price ceiling is below market price, so 
supply and demand are not as effective
Rent Control: Price ceiling that is placed on apartment rentals Local governments put a cap on apartment rental prices to keep 
housing affordable
This DOES NOT work… it doesn’t help poor residents find 
affordable housing and usually contributes to dangerous 
living conditions
Price Gouging Laws: temporary price ceiling for the prices that sellers may
charge during times of emergency
Example: During a hurricane, sellers are prevented from raising 
prices to keep victims of a natural disaster from being taken 
advantage of.
Demand is usually increased for many goods, but a shortage 
occurs because sellers don’t have motivation to provide more of 
these goods.
Price floor: Legal minimum price for a good/service Often is used to encourage the production of goods

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School: Miami University Hamilton
Department: OTHER
Course: Economics for Commerce
Professor: Monticha Sompolvorachai
Term: Spring 2018
Name: CMR 211, Module 5-6 Notes
Description: Chapter 5 & 6 Notes
Uploaded: 03/20/2018
3 Pages 28 Views 22 Unlocks
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