BUS 207 Lecture Notes - Lecture 5: Price Ceiling, Economic Surplus, Deadweight Loss
31 Oct 2017
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Firms are price takers (take price as is) Gov controls prices for price ceilings & price floors. If p > avc, losses will partially cover afc. If p < avc, losses do not even cover avc. Firms will enter until profits are 0 (p = min atc) Consumer surplus = diff b/t what consumer willing to pay for & what actually pays. Producer surplus = diff b/t what producer gets paid for good & how much willing to produce good for. Deadweight loss = diff b/t max potential surplus & actual surplus (price ceiling, or others) Transactions occur under conditions of incomplete/asymmetric info. All costs & benefits not fully reflected in input & output prices (externalities) = total social benefits + total social costs or consumer surplus + producer surplus. 2 primary characteristics: non-rivalrous in consumption = costs little/nothing to provide good to additional consumer, non-excludable = costly to exclude anyone. Difficult to charge for access b/c of free-rider problem.
