ECON 101 Chapter 4

• A competitive market generates equilibrium price (P) & Quantity (Q)
• A competitive market is efficient because it allocates supply to demanders who value them most
• A competitive market is efficient because it allocates demand to suppliers who can produce at a lower cost
• A competitive market is efficient because it maximizes total surplus - the sum of consumer surplus (CS) & producer surplus (PS)
• Consumer surplus is a consumers willingness to pay minus what the consumer pays

  • area below the demand curve & above the equilibrium price
  • considered consumers welfare
• Producer surplus is a producers price minus what the producer charges

  • area above the supply curve & below equilibrium price
  • considered producers welfare
• Price ceilings are a legally established max price sellers must accept what buyers can pay
• When price ceiling is above equilibrium, it is non-binding, having no effect on surplus or shortage
• When price ceiling is below equilibrium, it is binding, having a huge amount of shortage
• Price floor is a legally established minimum price sellers can charge & buyers must pay
• When a price floor is below equilibrium, it is non-binding & will have no effect on surplus or shortage
• When a price floor is above equilibrium, it is binding & will have a surplus
• Excise tax is per unit tax & deals only with quantity
• If taxes are collected by the seller, the graph shifts to the left - Supply + Tax

  • Buyers buy less & pay more
  • Sellers sell less & receive less
  • only government benefits
• If taxes are collected by the buyer, the graph shifts to the left - Demand - Tax

  • Buyers buy less but pay more
  • Sellers sell less & receive lower price
• If elasticity of supply is greater than elasticity of demand, the consumer/demander will pay more or pay more tax
• If elasticity of supply is less than elasticity of demand, the supplier will pay more or pay more tax
• If elasticity of supply is equal to elasticity of demand, suppliers & demanders pay an equal amount
• As tax rate increases, tax revenue increases, reaches a maximum & then decreases
• Dead Weight Loss is the amount lost by a company when a tax is added
• as tax rate increases, dead weight loss increases
• as elasticity of demand increases, dead weight loss increases
• as elasticity of supply increases, dead weight loss increases
• More vertical = less elastic
• More horizontal = more elastic
• Elasticity of demand on a vertical curve is zero
• Elasticity of demand on a horizontal curve is one