ECONOMIC, EFFICIENCY, GOVERNMENT PRICE SETTING, AND TAXES
Consumer Surplus and Producer Surplus
•Although most prices are determined by demand and supply in markets, the government sometimes imposes price ceilings and price floors. Price Ceiling
•Is a legally determined maximum price that sellers may charge. Price Floor
•Is a legally determined minimum price that sellers may receive. Economists analyze the effects of price ceilings and price floors using consumer’s surplus and producer surplus. Marginal Benefit
•Is the additional benefit to a consumer from consuming one more units of a good or service. The demand curve is also a marginal benefit to a consumer from consuming one more unit of a good or service. Consumer Surplus
•Is the difference between the highest price a consumer is willing to pay for a good or service and the rice the consumer actually pays. The total amount of consumer surplus in a market is equal to the area blow the demand curve and above the market price. Marginal Cost
•Is the additional cost to a firm of producing one more unit of a good or service. The supply curve is also a marginal cost curve. Producer Surplus
•Is the difference between the lowest price a firm is willing to accept for a good or service and the price it actually receives. The total amount of producer surplus in a market is equal to the area above the supply curve and below the market price.
The Efficiency of Competitive Markets
•Is a market outcome in which the marginal benefit to consumers form the last unit produced is equal to the marginal cost of production and where the sum of consumer surplus and producer surplus is at a maximum. When the market price is above or below the equilibrium price, there is a reduction in economic surplus. Marginal Benefit Equals Marginal Cost in Competitive Equilibrium Economic Surplus
•The sum of consumer surplus and producer surplus
In a competitive market, with many buyers...