ECON 101 Lecture 4: ECON 101 - Chapter 4 Notes

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University of British Columbia - Okanagan
ECON 101
Noriko Ozawa

Thursday, September 29, 2016 ECON 101 Lecture 4: Economic Efficiency, Government Price Setting and Taxes 4.1 Consumer Surplus and Producer Surplus Definitions: Consumer Surplus - The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays. Producer Surplus - The difference between the lowest price a firm would be willing to accept for a good and the price it actually receives. • Sellers are willing to supply an additional unit of a product only if the price is equal to or greater than the additional cost of producing that unit. Marginal Cost - additional cost of producing that unit in regards to the increase/ decrease in slope Measurements: Consumer Surplus (CS) = Highest price willing to pay - Cost of Item = Profit (Benefit) = Total Benefit received by consumers - Total Amount they pay Producer Surplus (PS) = Price seller actually receives - the Marginal cost Profit (benefit) = Total Amount received (Rx) - Cost of Production (Cx) Economic Surplus = how well the market is surviving = a measure of CS & PS 4.2 The Efficiency of Competitive Markets Definitions: Economic (Market) Efficiency - resources are used to generate the largest possible surplus to consumers and producers 1 Thursday, September 29, 2016 Efficiency - 1. goods are being consumed by the buyers who value them the most - 2. goods are being produced by the procedures with lowest cost - 3. raising or lowering the quantity of a good would not increase total surplus Requirement 1: Buyers who value the good most highly should get the good. Value of Buyer = height to the demand curve (Marginal Benefit) Marginal Benefit = total amount higher or lower than the point of equilibrium Requirement 2: Producers with lowest cost will supply the good. Producer with lowest cost = height to the supply curve (Marginal Cost) Marginal Benefit = total amount below or above the point of equilibrium Requirement 3: Equilibrium quantity maximizes total surplus. Market Equilibrium = Marginal Benefit = Marginal Cost = Demand = Supply Economic Efficiency • A Market outcome in which: • The Marginal Benefit to consumers of the last unit produced = to its Marginal Cost of Production • The sum of consumer surplus and producer surplus is at a maximum (Maximum Consumer Surplus + Maximum Producer Surplus) 4.3 Government Interventions in the Market • Government wants to help, so they produce price floors and ceilings. • Price Floor: minimum price seller can charge (e.g. minimum wage) • Price Ceiling: maximum price seller can charge (e.g. rent control) 2 Thursday, September 29, 2016 Price Floors Example: Employment (Wage in $/hr vs # of Unskilled workers) • Surplus (Qs > Qd) = Unemployment when wage is compared to the number of • unskilled workers At Competitive With Minimum Wage Changes (1) - (2) Equilibrium (1) of $10.25 (2) Consumer Surplus A+B+C A — (B+C) Producer Surplus D+F B+D +B—F Economic Surplus A+B+C+D+E A+B+D — (C+F) (Total Surplus)
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