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ECN 104 Lecture Notes - Lecture 4: Economic Surplus, Economic Equilibrium, Efficient-Market Hypothesis

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School
Ryerson University
Department
Economics
Course
ECN 104
Professor
German Pupato

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Document Summary

Consumer surplus, producer surplus, and the gains from trade. Gains from trade: both consumers and producers are better off because there is a market in this good. These gains from trade are the reason everyone is better off participating in a market economy than they would be if each individual tried to be self-sufficient. This brings the question of efficiency of markets. Claim: the maximum possible total surplus is achieved at market equilibrium. The market equilibrium allocates the consumption of goods among potential consumers and sales of a good among potential sellers in a way that achieves the highest gain to society. Compare total surplus in the market equilibrium to alternative allocations by a fictitious (cid:862)(cid:272)e(cid:374)t(cid:396)al pla(cid:374)(cid:374)i(cid:374)g autho(cid:396)ity(cid:863) As a result of these four functions, any way of allocating the good other than the market equilibrium outcome lowers total surplus. Fi(cid:396)st, although a (cid:373)a(cid:396)ket (cid:373)ay (cid:271)e effi(cid:272)ie(cid:374)t, it is(cid:374)"t (cid:374)e(cid:272)essa(cid:396)ily fai(cid:396).

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Related Questions

1. If we know that Canada exports maple syrup, we can conclude that maple syrup consumers in Canada are worse off than they would be in the absence of trade.

Is the statement true or false?

2. When a country opens up to trade in a good for which it has a comparative advantage, and the country begins to export the good, we can conclude that:

  a.

The domestic price will fall after trade opens up.
  b.

The total surplus for this good will increase as a result of opening up the market to international trade.
  c.

Opening the market to international trade will create a deadweight loss.
  d.

Both buyers and sellers in that country will be better off as a consequence of opening up the market to international trade.

Under a binding price ceiling, what does the change in consumer surplus represent?
A) The gain in surplus for those buyers who can still purchase the product at the lower price.
B) The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price.
C) The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy.
D) Both A and B are correct.
E) Both A and C are correct.

When the market price is held above the competitive level, the deadweight loss is composed of:

A) producer surplus losses associated with units that used to be traded on the market but are no longer exchanged.

B) consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
C) producer and consumer surplus losses associated with units that used to be traded on the market but are no longer exchanged.
D) There is no deadweight loss if the government uses a price floor policy to increase the price.

Compared to a tariff, an import quota, which restricts imports to the same amount as the tariff, will leave the country as a whole
A) worse off than a comparable tariff.
B) not as bad off as a comparable tariff.

C) about the same as a comparable tariff.

D) Any of the above can be true.

What is the welfare impact of a subsidy policy?
A) Producer surplus increases, consumer surplus declines, and total welfare declines.
B) Producer and consumer surplus increase, and these gains are larger than the government cost.

C) Producer and consumer surplus increase, and these gains are smaller than the government cost.

D) Producer surplus increases, consumer surplus declines, and total welfare increases due to the subsidy program.

Why is there a deadweight loss associated with subsidy payments?
A) There is no deadweight loss from a subsidy.
B) Quantity supplied is less than the equilibrium amount, so consumers and producers lose surplus value on those units that are no longer produced.
C) Quantity supplied exceeds the equilibrium amount, and consumer willingness to pay for these additional units is smaller than the marginal cost of producing them.
D) The subsidy payment does not distort quantities in the market, but the government cost exceeds consumer willingness to pay for the quantity demanded.

_____ 1. Suppose you make silver jewelry. If the price of silver falls, we would expect you to:

a. be willing and able to produce less jewelry than before at each possible price.

b. be willing and able to produce more jewelry than before at each possible price.

c. face greater demand for your jewelry.

d. face a weaker demand for your jewelry.

_____ 2. If suppliers expect the price of their product to fall in the future, then they will:

a. increase supply (supply curve shifts out) now.

b. decrease supply (supply curve shifts in) now.

c. increase supply in the future, but not now.

d. decrease supply in the future, but not now.

_____ 3. Consider the market for portable air conditioners, initially in equilibrium. When a heatwave strikes, the equilibrium price:

a. increases and equilibrium quantity decreases.

b. decreases, and the equilibrium quantity increases.

c. and quantity both increase.

d. and quantity both decrease.

_____ 4. Buyers can buy all they want to buy and sellers can sell all they want to sell at:

a. prices at and above the equilibrium price.

b. prices at and below the equilibrium price.

c. prices above and below the equilibrium price, but not at the equilibrium price.

d. the equilibrium price, but not at prices above or below the equilibrium price.

_____ 5. The law of supply and demand states that:

a. demand and supply curves shift out as time goes by.

b. the price of a goodwill rise in response to excess demand for that good.

c. when the supply curve for good shifts, the demand curve for that good shifts in response.

d. the equilibrium price of goodwill be rising more often than it will be falling.

_____ 6. If Doritos and Cheetos are substitutes, a rise in the price of Cheetos will cause:

a. the equilibrium quantity of Doritos to fall and the price of Doritos to rise.

b. the equilibrium quantity and price of Doritos to rise.

c. the equilibrium quantity and price of Doritos to fall.

d. the equilibrium quantity of Doritos to rise and the price of Doritos to fall.

_____ 7. New production technology is perfected that allows auto manufacturers to build an automobile using half the labor hours formerly needed. As a result:

a. the equilibrium quantity of automobiles increases and the price decreases.

b. the equilibrium quantity and price of automobiles increase.

c. the equilibrium quantity and price of automobiles decreases.

d. there is likely no change in the number of automobiles produced.

_____ 8. The U.S. government announces that it will raise the interest rate on college student loans beginning in January of next year. The immediate market impact is:

a. the demand curve for student loans shifts out.

b. the supply curve for student loans shifts out.

c. we anticipate that more student loans will be completed next year than this year.

d. all of the above are correct.

_____ 9. What curve shift produces a fall in price and increase in quantity exchanged?

a. An inward shift in the demand curve.

b. An inward shift in the supply curve.

c. An outward shift in the supply curve.

d. An outward shift in the demand curve.

_____ 10. We note that fewer motorcycles were sold this year than last and that the price is also lower. What event could have caused this outcome?

a. A technological change that improved the fuel efficiency of motorcycles.

b. A rise in the wages paid to motorcycle manufacturing workers.

c. A motorcycle craze due to the popularity of Sons of Anarchy.

d. Increasing concerns about health impacts from breathing motorcycle exhaust.

_____ 11. The price that results in quantity supplied equaling quantity demanded is the optimal (best) price because it:

a. maximizes the combined welfare of buyers and sellers.

b. maximizes the cost of the seller.

c. minimizes the expenditure of buyers.

d. all of the above are correct.

_____ 12. Consumer surplus is the:

a. quantity of good consumers get without paying anything.

b. amount a consumer pays minus the amount the consumer is willing to pay.

c. amount a consumer is willing to pay minus the amount the consumer pays.

d. value of a good to a consumer.

_____ 13. In a market, the marginal buyer is the one:

a. whose willingness to pay is higher than all other buyers and potential buyers.

b. whose willingness to pay is lower than all other buyers and potential buyers.

c. who is willing to buy exactly one unit of the good.

d. who would be the first to leave the market if the price were any higher.

_____ 14. If a consumer is willing and able to pay $20 for a particular good and if she actually pays $16 for the good, then her consumer surplus is:

a. $4.

b. $16.

c. $20.

d. $36.

_____ 15. Suppose there is an early freeze in California that reduces the size of the orange crop. What happens to consumer surplus in the market for oranges?

a. Consumer surplus increases.

b. Consumer surplus decreases.

c. Consumer surplus is not affected by this change.

d. We would have to know whether the demand for oranges is elastic or inelastic.

_____ 16. Producer surplus is the area on a supply/demand graph:

a. under the supply curve.

b. between the supply and demand curves.

c. below the price line and above the supply curve.

d. under the demand curve and above the price line.

_____ 17. Economists typically measure economic efficiency using:

a. total producer and consumer surplus.

b. profits to firms.

c. the quantity supplied by sellers.

d. the price paid by buyers.

_____ 18. Which of the following statements is correct?

a. Efficiency and equality are both maximized when total surplus is maximized.

b. Efficiency deals with the size of the economic pie; equality with how fairly the pie is sliced.

c. Efficiency is more difficult to evaluate than equality.

d. Equality is judged on positive grounds; efficiency requires normative judgments.

_____ 19. The price elasticity of demand measures how much:

a. quantity demanded a response to changes in price.

b. quantity demanded a response to changes in income.

c. price responds to a change in demand.

d. Both a and c are correct

_____ 20. Goods with many close substitutes tend to have:

a. less elastic demands.

b. more elastic demands.

c. price elasticities of demand that are unit elastic.

d. income elasticities that are negative.

Short Answer Questions:

All of the following questions are based on the data shown here for coffee demand and supply at a fictional Columbus coffee shop called Go-bucks.

Price Quantity Quantity

per Cup Demanded Supplied

$1.60 1,700 1,220

$1.80 1,555 1,300

$2.00 1,400 1,400

$2.20 1,235 1,520

$2.40 1,060 1,660

$2.60 875 1,820

_____ 21. (6 points) Using the mid-point formula, calculate the price elasticity of demand as the price increases from $1.60 to $1.80.

_____ 22. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $1.80 to $2.00.

_____ 23. (6 points) Repeat the calculation of the price elasticity of demand, this time for a price increase from $2.40 to $2.60.

24. (4 points) Over which price range is demand inelastic? Over which price range is demand elastic? Does this follow the trend noted in class?

_____________________________________________________________________________

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_____ 25. (6 points) Turning to the supply side, calculate the price elasticity of supply as the price increases from $2.20 to $2.40.

26. (2 points) How would you describe the price elasticity of supply over this range?

_____________________________________________________________________________

_____________________________________________________________________________