4. Market Efficiency

• Efficiency: producing the goods that society wants at the lowest possible cost. An efficient outcome means that it is not possible to make someone better off without making someone else worse off.
• Demand curve: Willing and able to pay. 
• Consumer surplus: Difference between what a consumer is prepared to pay and what they actually pay in the market.
• Consumer surplus: Below the demand curve & above the price point (i.e. Price you actually pay).
• Consumer surplus: Willing to pay $8, but purchase it for $5, so the consumer surplus is $3.
• Consumer surplus: Amount of additional satisfaction for consumer
• Marginal benefit: Demand curve can also be a marginal benefit curve.
• Marginal benefit: Extra benefit from consuming one extra unit of good or service.
• Marginal benefit: The more you consumer of a product, the marginal benefit decreases. Like diminishing returns.
• Producer surplus: Difference between what a producer is willing to receive (minimum supply price or cost of production) and what they actually receive in a market.
• Producer surplus: Above supply curve & below price point.
• Marginal Cost: Supply curve can also be a marginal cost curve.
• Marginal Cost: The extra opportunity cost of producing one more unit of a good or service.
• Total surplus: Measures the net benefits to society from the production and consumption of the good.
• Total surplus: Economic Efficiency occurs when total surplus is at a maximum. Total surplus is only maximised at equilibrium.
• Total surplus: Total Surplus is maximised when market price = equilibrium price → Allocative efficiency achieved.
• Total surplus = Consumer surplus + producer surplus
• Total surplus: When CS & PS are maximised, TS is also maximised
• Dead weight loss: Loss in total surplus that is avoidable.
• Dead weight loss: Any points NOT at the market equilibrium means there is inefficiency and total surplus is not maximised.
• Dead weight loss: Dead weight loss represents a loss of economic efficiency because the market is not operating at its equilibrium point, where marginal benefit equals marginal cost.
• Total surplus = total benefits - total costs
• Producer surplus is always under the ORIGINAL supply curve.
• Direct taxes

  • The group the tax is levied on, also pays the burden of the tax
• Indirect tax

  • The group the tax is levied on passes the burden onto another group
  • E.g. GST. Consumers do not pays the tax directly, but are affected through changes in the price of the good or service
• Why tax? To earn revenue for Public services
• Why tax? To correct externalities. i.e. Disincentives consumption
• Why tax? Can aid in the redistribution of income
• Dead weight loss

  A loss of economic efficiency because the market is not operating at its equilibrium point, where marginal benefit equals marginal cost
• Overproduction in a market

  Results in dead weight loss
• Underproduction in a market

  Results in dead weight loss
• Dead weight loss means allocative efficiency is not reached/maximised, therefore the market is inefficient
• Economic Efficiency


  Occurs when total surplus is at a maximum
• Total surplus is only maximised at equilibrium
• Total Surplus


  Maximised when market price = equilibrium price
• Allocative efficiency

  Achieved when total surplus is maximised
• Taxes increase the cost of production to reduce supply.

  
• Impact of tax: Creates dead weight loss
• Impact of tax: Tax incidence depends on the elasticity of the good/service
• Impact of tax: Prices are pushed up, quantity decreases