Economics Economics 22060-002
Popular in PRINCIPLES OF MICROECONOMICS
Popular in Economcs
verified elite notetaker
This 5 page Class Notes was uploaded by Brendan O'Donnell on Wednesday March 2, 2016. The Class Notes belongs to Economics 22060-002 at Kent State University taught by Harris, Jeremiah R. in Winter 2016. Since its upload, it has received 28 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Kent State University.
Reviews for Economics
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 03/02/16
Efficiency and Government Actions in Markets Allocative Efficiency: resources are used where they are the most highly valued What measures value? What measures the value of the best alternative? If MB > MC then we purchase more of the good and quantity rises (value here > value of alternative) If MB<MC then we purchase less of the good, quantity decreases If MB = MC then Q stays constant Consider D: Qd = 1/2 *P + 6 S: Qs = 2*P – 4 At any quantity different then the equilibrium quantity (Q*) we need ________________________ Q to become more efficient. This results in only one point that does not require movement to be efficient— Equilibrium Thus, Allocative Efficiency only occurs This is also the point at which total surplus is maximized Consumer Surplus: CS = ∑(Q) (MB P) This is graphically seen as the area below the demand curve, but higher then the price. Producer Surplus: PS = ∑(Q) (P MC) This is graphically seen as the area below the price, but higher then the supply curve. INNEFEICIENCY What if production is not at the efficient level? Overproduction and underproduction results in losses to efficiency Discussed later: Obstacles to efficiency o Price controls and quotas (#5) o Taxes (#5) o Lack of competition : Monopoly #11) o Externalities (#6) o High transactions costs Dead Weight Loss: Underproduction: Q<Q* Consider D: Qd = 1/2 *P + 6 S: Qs = 2*P – 4 Price Ceiling: Examples: caps, rent controls, salary caps, utilities Creates the following: o A shortage o Increased Search Activity o Black Market Price Floor: Examples: minimum wage, farm price supports Demand: Qd = 2000 – 2P Supply: Qs = P 400 Ceiling Level: $600 Creates Shortage of _____ units Price ceiling above the equilibrium are not effective No change if the price cannot raise above a level it was never at If effective, a price ceiling always creates a • Allocating the shortage 1. Lines (waiting) • Who will get item? – Those with the lowest cost of waiting – True cost = price + cost of waiting 2. Circumvent the rule • Key money (high prices for something necessary other then rent) 3. Coupons • Ration Coupons • Black Market for Coupons Dead Weight Loss: Effective Price Floor must be above equilibrium level Example: Minimum Wage, equilibrium at $5 but minimum wage set to $6.25, enforcement via wage change Effective Price Floor must be above equilibrium level Example: Minimum Wage, equilibrium at $5 but minimum wage set to $6.25, enforcement via wage change Example: Agricultural Price Support Equilibrium price = $3, Target Price = $3.5, enforced via government purchases of surplus • Example: – Bob has a Toyota Camry he wants to sell. • Minimum he would accept is $8,500 – Tom wants to buy a Toyota Camry • Max he would pay is $9,000 – Government imposes a 10% sales tax – Will trade occur? • Price consumer pays = Pc • Price seller receives = Ps Pc = Ps + tax Ps = Pc – tax • Tax incidence – division of the burden of a tax between buyer and seller • What about tax on Consumers instead of Producers • Same Sharing rule as alternate • Key Takeaways: – Whoever is _____ elastic bears more of the tax burden (has higher tax incidence) – Intuitively, who ever is more willing to change, will bear less of the tax because they will quickly go elsewhere – If εd > εs then producers bear more of burden – If εd < εs then consumers bear more of burden • Subsidy: a payment made by the government to a producer • Quotas: maximum (upper limit) of production • Allocative Efficiency—when this occurs and what this means for surplus • Consumer/Producer Surplus and Dead Weight Loss • Price Floors/Ceilings (effective or not) • Taxes: – Tax Incidence – Relationship to elasticity • Subsidies • Quotas **For all of the above, please know DWL, Consumer Surplus, and Producer Surplus.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'