Topic 4+5

Cards (56)

  • Market efficiency: Producing the goods that society wants at the lowest possible cost
  • Consumer surplus: The difference between what a consumer is prepared to pay and what they actually pay.
  • Producer surplus: The difference between what a producer is willing to receive (minimum supply price or cost of production) and what they actually receive.
  • Total Surplus: A measure of the net benefits to society from the production and consumption of a good.
    • TS = CS + PS
    • TS = total benefits - total costs
  • Economic effiency occurs when total surplus is at maximum. Total surplus is only maximised at equilibrium. This means that a competitive market is the best way to allocate scarce resources as it leads to the greatest gain for society.
  • tax shown on graph
  • (Tax) Consumers are worse off because they must now pay a higher price and consume a lower quantity. Consumer surplus decreases.
  • (Tax) Producers are worse off because they receive a lower price and sell less. Producer surplus decreases.
  • The government will collect tax revenue, and ultimately are the only party who benefits.
  • Tax creates a dead weight loss because total surplus or economic welfare has been reduced.
  • Taxes are necessary in order to fund government spending.
  • The objective is to place taxes on goods where the dead weight loss will be minimised.
  • Taxes are usually on petrol, alcohol, and tobacco (demand is inelatic)
  • A subsidy is a grant paid to a producer with the purpose of reducing costs and increasing output.
  • subsidy shown on graph
  • (Subsidy) Consumers are better off because they now pay a lower price and consume a greater quantity. Consumer surplus increases.
  • (Subsidy) Producers are also better off because they receive a higher amount of money, including the subsidy paid by the government, and sell more. Producer surplus increases.
  • Cost of subsidy is greater than combined increase in consumer and producer surplus.
  • Subsidy creates a dead weight loss because total surplus has been reduced.
  • A price ceiling is a legislated maximum price that sellers are allowed to charge in the market. They are designed to benefit consumers by keeping price below the market clearing price.
  • price ceiling
  • The maximum price for a price ceiling is usually set below equilibrium price (below market clearing price).
  • A price ceiling can result in a shortage being created. Shortage can lead to a higher black market price (Pbm). Decrease in total surplus (DWL)
  • A price floor is a legislated minimum price somewhere above market price. Price floors are designed to help producers.
  • price floor
  • Surplus is created from price floors. Producer surplus increases, while consumer surplus decreases. Results in a decrease of total surplus, creation of dead weight loss and decrease in effiency.
  • Market failure: Market system uses demand and supply to reflect society's benefits and costs - as long as market captures all benefits and costs, then market is best way to allocate resources.
  • Market failure occurs when resources are not allocated efficiently - in other words, total economic surplus is not being maximised.
  • A competitive market is one characterised by a large number of small firms, free entry and exit and very little product different,iation
  • An imperfect market exists when:
    • relatively small number of firms
    • firms have market power
    • firms use product differentiation
    • barriers to entry are used to restrict competition
  • Imperfect markets are said to have market power which means they can set the price
  • A monopoly is a market with just one firm.
  • An oligopoly is a market with a few dominant firms.
  • Monopoly and oligopoly have extensive market power because they operate in markets with little effective competition.
  • Monopoly will reduce output to Q1 to increase prices to P1. Consumers are worse off as they pay higher prices for less quantity (consumer surplus decreases). Producer surplus increases, and they gain. Society is worse off as total surplus decreases by the area DWL. Dead weight loss represents loss in economic welfare because the market has been restricted.
  • Competition and Consumer Act 2010
    • administered by the Australian Competition and Consumer Commission (ACCC)
    • contains rules against anti-competitive conduct to ensure fair and effective competition
  • Role of ACCC is to protect, strengthen, and supplement the way competition works in Australian markets and industries to improve the efficiency of the economy and increase welfare of Australians.
  • There are many circumstances when the production or consumption of a good may create external costs and/or external benefits. These external or side effects of economic activity are called externalities.
  • Negative externalities: When economic actions from either production or consumption create an external cost, it is referred to as a negative externality and will cause the market quantity to be greater than the optimal quantity and will cause the market price to be less than the optimal price.
  • Negative externality example: Using the freeway at peak time to travel to work - a private decision made. The economic action of driving on the freeway imposes a cost on other drivers - an externality. Car adds congestion experienced by all other cars.