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Chapter 4

ECO2023 Chapter Notes - Chapter 4: Price Floor, Demand Curve, Price Ceiling

Department
Economics
Course Code
ECO2023
Professor
John Slattery
Chapter
4

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Microeconomics Chapter 4 Economic Efficiency, Government Price Setting, and Taxes
â€¢ Price Ceiling â€“ a legally determined maximum price that sellers may charge
o Rent Control
â€¢ Price Floor â€“ Legally determined minimum price that sellers may receive
â€¢ 4.1 Consumer Surplus and Producer Surplus
o Consumer surplus measures the dollar benefit consumers receive from buying products
in a particular market
â–ª The difference between the highest price a consumer is willing to pay for a good
or service and the actual price the consumer pays
â–ª Use demand curve to measure the total consumer surplus in a market
â–ª Consumers are willing to purchase a product up to the point where the marginal
benefit of consuming a product equal to its price
â–ª Marginal Benefit â€“ additional benefit to a consumer from consuming one more
unit of a good or service.
â–ª Total amount of consumer surplus in a market is equal to the area below the
demand curve and above the market price
o Producer surplus is the dollar benefit firms receive from selling goods or services in a
particular market
â–ª Supply curves show the firms willingness to supply a product at different prices
â€¢ Depending on price to produce product
â–ª Marginal Cost â€“ additional cost to affirm of producing one more unit of a good
or service
â–ª The difference between the lowest price a firm would be willing to accept for a
good or service and the price it actually receives
o Economic surplus in a market is the sum of the consumer surplus and producer surplus
o When the government imposes a price ceiling or a price floor, the amount of economic
surplus in a market is reduced
â€¢ 4.2 The Efficiency of Competitive Markets
o Competitive market â€“ a market with many buyers and sellers
o Marginal Benefit Equals Marginal Cost in a Competitive Equilibrium
o Equilibrium in a competitive market results in the economically efficient level of output
at which marginal benefit equals marginal cost
o Economic Surplus
â–ª In a market â€“ the sum of consumer surplus and producer surplus
â–ª In a competitive market â€“ economic surplus is at maximum when the market is
in equilibrium
â–ª The reduction in economic surplus resulting from a market not being in a
competitive equilibrium
o Economic Surplus and Economic Efficiency
â–ª Economic surplus is the best way to measure the benefit to society from the
production of a particular good or service
â–ª Equilibrium in a competitive market results in the greatest amount of economic
surplus, or total net benefit to society from a production of a good or service
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