New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Week 5 - Chapter 4 Principles of Economics - Microeconomics

by: Caroline Jok

Week 5 - Chapter 4 Principles of Economics - Microeconomics ECON 1011

Marketplace > George Washington University > Economcs > ECON 1011 > Week 5 Chapter 4 Principles of Economics Microeconomics
Caroline Jok
GPA 3.8

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

Professor Foster Micro Economics Economics 1011 Chapter 4 Hubbard and O'Brien
Principles of Economics I
Foster, I
Class Notes
25 ?




Popular in Principles of Economics I

Popular in Economcs

This 4 page Class Notes was uploaded by Caroline Jok on Wednesday September 30, 2015. The Class Notes belongs to ECON 1011 at George Washington University taught by Foster, I in Fall 2015. Since its upload, it has received 58 views. For similar materials see Principles of Economics I in Economcs at George Washington University.


Reviews for Week 5 - Chapter 4 Principles of Economics - Microeconomics


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: 09/30/15
Foster Econ 1011 Economics 1011 Foundations and Models Ch. 4 Notes – Economic Efficiency, Government Price Setting and Taxes Hubbard & O’Brien – Micro Economics This week’s Quiz: Ch. 4.1 – 4.3 Price Ceiling: Legally determined maximum price that sellers may charge. Price Floor: Legally determined minimum price that sellers may receive. -­‐   In a competitive Market: price adjusts so that Quantity demanded equals quantity supplied. o   In other words: Equilibrium = every consumer willing to pay the market price is able to buy as much of the product as the consumer wants & every firm that accepts market price can sell as much as it wants -­‐   Government also intervenes through taxes -­‐   Government influence (floor, ceiling, tax) -­‐   Consumer/producer surplus and deadweight loss = concepts to analyze economic effects of price ceilings/floors/taxes 4.1 Consumer Surplus and Producer Surplus -­‐   Consumer Surplus: dollar benefit consumers gain from buying in a particular market. -­‐   Producer Surplus: dollar benefit from selling -­‐   Economic Surplus: sum of consumer + producer surplus -­‐   Consumer Surplus o   Demand curves show the willingness of consumers to purchase a product at different prices. o   Consumers are willing to purchase up to the point where the marginal benefit is equal to price o   Marginal Benefit: additional benefit to consumer from consuming one more unit of a good/service o   Total consumer surplus in a market is equal to the area below the demand curve and above the market price. -­‐   Producer Surplus o   Shown on supply curves – Willingness of firms to supply a product at different prices o   An additional unit will be supplied if they receive a price equal to the additional cost of producing that unit o   Marginal cost: additional cost to a firm of producing one more unit of a good/service o   Producer Surplus: Difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives. o   Total amount of producer surplus in a market is equal to the area above the market supply curve and below the market price -­‐   What consumer surplus and producer surplus measure o   Consumer surplus measures the net benefit to consumers (not the total benefit) o   Producer Surplus measures the net benefit received by producers 4.2 - The Efficiency of Competitive Markets -­‐   Competitive market: market with many buyers and sellers -­‐   Advantage of market system: results in efficient economic outcomes -­‐   Marginal Benefit Equals Marginal Cost in Competitive Equilibrium o   Economically efficient: product produced where the marginal benefit to buyers is greater than or equal to the marginal cost of production o   Equilibrium in a competitive market results in the the economically efficient level of output, at which marginal benefit equals marginal cost -­‐   Economic Surplus o   Economic Surplus: sum of consumer surplus and producer surplus. o   In a perfectly competitive market, economic surplus is at a maximum when market is in equilibrium. -­‐   Deadweight Loss o   Deadweight loss: reduction in economic surplus resulting from a market not being in competitive equilibrium. §   From “missing” goods -­‐   Economic Surplus and Economic Efficiency o   Measures the benefit to society from the production of a particular good/service o   Economic efficiency can be characterized as : Equilibrium in a competitive market resulting in the greatest amount of economic surplus/total net benefit to society from the production of a good/service o   Anything that obstructs competitive equilibrium, reduces economic efficiency o   Economic Efficiency: Market outcome where marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum. 4.3 – Government Intervention in the Market: Price Floors and Price Ceilings -­‐   As previously noted: the government can intervene with price floors and ceilings and taxes -­‐   To affect the market o   Price floors must be above the equilibrium price o   Price ceilings must be below equilibrium price o   Else: will not be binding -­‐   Price Floors: Government Policy in Agricultural Markets: o   Federal governments farm programs have often resulted in large surpluses of agricultural products -­‐   Price Floors in Labor Markets: The Debate over Minimum Wage Policy o   Minimum wage = price floor o   Supporters §   Way of raising the incomes of low-skilled workers o   Opponents §   Results in fewer jobs §   Large costs on small businesses o   Results: The quantity of labor supplied will increase and the demand will decrease leading to a surplus of workers unable to find jobs o   Will cause a deadweight loss o   Alternatives: §   Earned income tax credit: •   Reduces the amount of tax that low-income wage earners would otherwise pay to the federal government. -­‐   Price Ceilings: Government Rent Control Policy in Housing Markets o   Support for price floors typically comes from sellers o   For setting ceilings from consumers o   Rent control is a price ceiling à reduces economic efficiency -­‐   Black Markets and Peer-to-Peer Sites o   Ways around the controls: Black Markets: which buying/selling take place at prices that violate government price regulations o   The sharing economy also has the potential to improve economic efficiency and make available to consumer goods at lower prices. -­‐   The Results of Government Price controls: Winners, Losers, and Inefficiency o   With rent control: §   Winners: people paying less for rent; land lords if they break the law and charge above the legal maximum provided that their rate is higher than the competitive equilibrium rents would be. o   Losers: §   Land lords who abide by the law §   Renters who can’t find apartments to rent at the controlled price o   Reduces economic efficiency because fewer apartments are rented than would be rented in a competitive market (dead weight loss) -­‐   Positive and Normative Analysis of Price Ceilings and Price Floors: o   Competitive markets have played in raising the average person’s standards of living o   Government intervention has the potential to reduce the ability of the market system to produce similar increases in living standards in the future. o   Positive analysis: WHAT IS o   Normative: WHAT SHOULD BE o   Analysis of rent control and fed farm program is positive analysis. o   Whether these programs are desirable or undesirable is normative 4.4 – The Economic Impact of Taxes -­‐   Public finance: analyzing taxes -­‐   The Effect of taxes on Economic Efficiency o   government taxesàless of the good/service will be produced and consumed. o   Equilibrium will fall o   Reduces BOTH consumer and producer surplus o   Excess burden: the deadweight loss from taxes o   Tax is efficient if it imposes a small excess burden relative to the tax revenue it raises. -­‐   Tax Incidence: Who actually Pays a tax? o   Tax Incidence: The actual division of the burden of tax between buyers and sellers o   The incidence of a tax does not depend on whether the government collects a tax from the consumers or producers -­‐   Is the Burden of the Social Security Tax Really Shared Equally between Workers and Firms? o   Requiring workers and employers to each pay half the tax does NOT mean that the burden of the tax is shared equally.


Buy Material

Are you sure you want to buy this material for

25 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


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'

Why people love StudySoup

Steve Martinelli UC Los Angeles

"There's no way I would have passed my Organic Chemistry class this semester without the notes and study guides I got from StudySoup."

Jennifer McGill UCSF Med School

"Selling my MCAT study guides and notes has been a great source of side revenue while I'm in school. Some months I'm making over $500! Plus, it makes me happy knowing that I'm helping future med students with their MCAT."

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Parker Thompson 500 Startups

"It's a great way for students to improve their educational experience and it seemed like a product that everybody wants, so all the people participating are winning."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.