4.1.5

• define consumer surplus

  the difference between the price consumer is willing to pay for a product and the price that is actually paid
• define producer surplus

  the difference between the price a producer is willing to receive for their supply and the price that is actually received
• draw a supply and demand graph with consumer and producer surplus labelled 


  p

  
• draw a graph for an added indirect tax and explain the effect of surplus

  the reduction in consumption due to the tax creates a deadweight welfare loss

  its also reduces consumer and producer surplus as the price increases

  
• How can consumer surplus be represented on a diagram?

  As the area above the price line and below the demand curve
• How is consumer surplus calculated when the price changes?

  By finding the area below the demand curve above the new price line
• How can producer surplus be represented on a diagram?

  As the area above the supply curve and below the price line
• What happens to producer surplus when the price increases?

  Producer surplus increases
• What is society's surplus in economics?

  Sum of consumer surplus and producer surplus
• How is society's surplus represented on a diagram?

  As the entire triangle formed by consumer and producer surplus
• What happens to consumer surplus when there is a leftward shift in supply?

  Consumer surplus decreases
• How do we calculate consumer surplus after a supply shift?

  By finding the area beneath the demand curve above the new price line
• What happens to producer surplus when demand shifts to the right?

  Producer surplus increases
• How do we calculate producer surplus after a demand shift?

  By finding the area above the supply curve beneath the new price line
• What shapes do consumer and producer surplus typically take?

  Usually triangular shapes
• Why is it important to understand consumer and producer surplus?

  It helps in resource allocation decisions
• what are the key characteristics of a perfectly competitive market

  lots of sellers

  low market concentration

  no barriers to entry or exit

  perfect information

  normal profits in the long run

  homogenous products

  price taker
• what are the key characteristics of monopolistic competition

  lots of sellers

  low market concentration

  low barriers to entry and exit

  imperfect information

  normal profits in the long run

  differentiated products

  price maker
• what are the key characteristics of an oligopoly

  few sellers

  high market concertation

  high barrier to entry and exit

  imperfect information

  super normal profits in the long run

  differentiated products

  price maker
• what are the key characteristics of a pure monopoly

  one seller

  1:100 market concertation

  high barriers to entry and exit

  imperfect information

  supernormal profits in the long run

  no competitors to differentiate from

  price maker
• what is the divorce of ownership from control

  the people that own the business don't run the business shareholders appoint directors

  owners are seemed to be more focused on profit than directors who may have other objectives. this can create tension and problems for the business
• what is the principle agent problem

  if a principle delegates a task to an agent and gets a suboptimal outcome there is a problem.

  this happens because

  the principle doesn't have the information on how the agent will act

  the interests of the two diverge
• what is meant by organisation theory

  large firms make decisions in groups

  this means more objectives are considered when making decisions
• define satisficing profits

  a firm aims to produce satisfactory profits rather than maximising profits
• what are some other objectives rather than profits maximisation

  satisficing

  survival

  growth

  quality

  market share

  cost reduction

  ethical and environmental

  However a lot of these could support long run profit maximisation