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Economics Day 5.docx

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Olivia Ozlem Mesta

Economics Day 5 Lecture Wednesday October 10Chapter 7 Willingness to Pay and Consumer SurplusAllocation of resources iso How much of a good to produce o Who will produce it o Who will consume it Willingness to pay how much a consumer values a good are they willing to pay at a certain priceA WTP demand curve looks like a staircase because it works with ranges between 5 and 10 4 people buyThis will still hold true if there is a higher number of buyers but it is not noticeable and looks like a traditional demand curveAt any quantity the height of the demand curve is the WTP of the buyerMarginal buyer the buyer who will be lost if the price is raisedConsumer Surplus is the amout a buyer is willing to pay minus what the buyer actually pays CS WTPPo Cannot be negative because if price is higher than WTP the consumer will not buy the productThe consumer surplus is the area found below the demand curve and above the priceConsumer surplus area can be calculated using the area of a triangle formula with price x quantity x 05If a consumers WTP is less than price they will not purchase that productHigher price decreases consumer surplus because buyers leave the marketMeasures benefit to buyers in market Cost and the Supply CurveCost is the value of everything a seller must give up to produce a goodIncludes cost of resources and timeA seller will only sell a product if price exceeds cost willingness to sellA marginal seller is the seller who would leave the market if the price were any lowerProducer surplus pricecost o Cannot be negative because sellers will not sell if cost exceeds priceProducer surplus can be calculated the same way as consumer surplusThe area under the price above the supplyThe producer surplus will lower as price lowers because sellers leave marketMeasures benefit to suppliers in market Total SurplusConsumer surplusproducer surplus or more simply value to buyers cost to sellersThis measures the gains from trade in a marketMaximizing surplus is the most efficient use of resourcesEfficiency meas o Goods being consumed by those who value it the most o Goods being produced at lowest cost o Raising or lowering total quantity of goods does not increase total surplusEfficiency focuses on maximizing size of pie and equity focuses on equal share of pie but we focus on efficiencyEvaluating the Market Equilibrium Equilibrium ensures buyers who value the good the most buy the good where demand is greater than priceEquilibrium sellers produce at lowest cost where supply is less than priceSee slides for a visual representation of aboveIf you are producing at a quantity above the equilibrium you will increase efficiency by decreasing quantityIf you are producing at a quantity below the equilibrium you will increase efficiency by increase quantityThe equilibrium quantity maximizes surplus and therefore efficiencyProducing below the equilibrium will work but is not most efficient the value to consumers is above the price and the cost to sellers is below the price but it is not the most efficient Producing above the equilibrium will not workCentrally planned economies are not very efficient because the planner must know every single buyers WTP and the cost to every seller to determine efficiencyTherefore centrally planned economies are never very efficient Chapter 8 The Effect of a Tax Raises price to buyers lowers money sellers receiveTax revenue area is between price to buyers and money to sellers at the new quantity Tax revenue section included in total surplus The area lost is called the DWL see chapter 8 slides 58The deadweight loss is the fall of the total surplusHard to take notes so look at examples on slides 10 and onward chapter 8Government must tax for revenueHow do we choose which goods and services to tax o The business with lowest DWLWhen supply and demand are inelastic the DWL is lowerThe relationship between DWL and tax increases is exponentialo When a tax is doubled the DWL increases by more than doubleThe Laffer Curve represents the size of the tax and tax revenue
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