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Consumer surplus The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
Marginal benefit The additional benefit to a consumer from consuming one more unit of a good or service.
Consumer Surplus and Producer Surplus
Consumer Surplus
Learning Objective 4.1
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Learning Objective 4.1
Consumer Surplus and Producer Surplus
Consumer Surplus
FIGURE 4-1
Deriving the Demand Curve for Chai Tea
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Consumer Surplus and Producer Surplus
Consumer Surplus
FIGURE 4-2
Measuring Consumer Surplus
Learning Objective 4.1
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Consumer Surplus and Producer Surplus
FIGURE 4-3
Total Consumer Surplus in the Market for Chai Tea
Learning Objective 4.1
Consumer Surplus
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The Consumer Surplus fromSatellite Television
Consumer surplus allows us to measure the benefit consumers receive in excess of the price they paid to purchase a product.
Makingthe
Connection
Learning Objective 4.1
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Consumer Surplus and Producer Surplus
Producer surplus The difference between the lowest price a firm would have been willing to accept and the price it actually receives.
Marginal cost The additional cost to a firm of producing one more unit of a good or service.
Producer Surplus
Learning Objective 4.1
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Producer Surplus
FIGURE 4-4
Calculating Producer Surplus
Learning Objective 4.1
Consumer Surplus and Producer Surplus
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Learning Objective 4.1
Consumer surplus measures the net benefit to consumers from participating in a market rather than the total benefit.
The net benefit equals the total benefit received by consumers minus the total amount they must pay to buy the good.
Producer surplus measures the net benefit received by producers from participating in a market.
Producer surplus is the total amount firms receive from consumers minus the cost of producing the good.
What Consumer Surplus and Producer Surplus Measure
Consumer Surplus and Producer Surplus
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The Efficiency of Competitive Markets
FIGURE 4-5
Marginal Benefit Equals Marginal CostOnly at Competitive Equilibrium
Marginal Benefit Equals Marginal Cost in Competitive Equilibrium
Learning Objective 4.2
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Economic surplus The sum of consumer surplus and producer surplus.
Economic Surplus Equals the Sum of Consumer Surplus and Producer Surplus
The economic surplus in a market is the sum of the blue area, representing consumer surplus, and the red area, representing producer surplus.
Figure 4.6
Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
Equilibrium in a competitive market results in the greatest amount of economic surplus, or total net benefit to society, from the production of a good or service.
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The Efficiency of Competitive Markets
FIGURE 4-7
When a Market Is Not in Equilibrium There is a Deadweight Loss
Deadweight Loss
Deadweight loss The reduction in economic surplus resulting from a market not being in competitive equilibrium.
Learning Objective 4.2
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The Efficiency of Competitive Markets
Economic efficiency A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum.
Economic Surplus and Economic Efficiency
Learning Objective 4.2
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Price ceiling A legally determined maximum price that sellers may charge.
Price floor A legally determined minimum price that sellers may receive.
Economic Efficiency, Government Price Setting, and Taxes
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Government Intervention in the Market:Price Floors And Price Ceilings
FIGURE 4-8
The Economic Effect of a Price Floor in the Wheat Market
Price Floors: Government Policy in Agricultural Markets
Learning Objective 4.3
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Price Floors in Labor Markets: The Debate Over Minimum Wage Policy
Makingthe
Connection
Learning Objective 4.3
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Government Intervention in the Market:Price Floors And Price Ceilings
FIGURE 4-9
The Economic Effect of a Rent Ceiling
Price Ceilings: Government Rent Control Policy in Housing Markets
Don’t Let This Happen to YOU!Don’t Confuse “Scarcity” with a “Shortage”
Learning Objective 4.3
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17 of 33© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
Government Intervention in the Market:Price Floors And Price Ceilings
The Results of Government Price Controls: Winners, Losers, and Inefficiency
When the government imposes price floors or price ceilings, three important results occur:
Learning Objective 4.3
• Some people win.
• Some people lose.
• There is a loss of economic efficiency.
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Government Intervention in the Market:Price Floors And Price Ceilings
Positive and Normative Analysis of Price Ceilings and Price Floors
Whether rent controls or federal farm programs are desirable or undesirable is a normative question.
Whether the gains to the winners more than make up for the losses to the losers and for the decline in economic efficiency is a matter of judgment and not strictly an economic question.
Learning Objective 4.3
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The Economic Impact of Taxes
The Effect of Taxes on Economic Efficiency
FIGURE 4-10
The Effect of a Tax on the Market for Cigarettes
Learning Objective 4.4
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The Economic Impact of Taxes
Tax Incidence: Who Actually Pays a Tax?
Tax incidence The actual division of the burden of a tax between buyers and sellers in a market.
Learning Objective 4.4
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The Economic Impact of Taxes
Tax Incidence: Who Actually Pays a Tax?
Determining Tax Incidence on a Demand and Supply Graph
FIGURE 4-11
The Incidence of a Tax on Gasoline
Learning Objective 4.4
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The Economic Impact of Taxes
Tax Incidence: Who Actually Pays a Tax?
Does It Matter Whether the Tax Is on Buyers or Sellers?
FIGURE 4-12
The Incidence of a Tax on Gasoline Paid by Buyers
Learning Objective 4.4
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Solved Problem 4-4When Do Consumers Pay All of a Sales Tax Increase?
Learning Objective 4.4
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Is the Burden of the Social Security Tax Really Shared Equally between Workers and Firms?
Makingthe
Connection
Learning Objective 4.4
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Consumer surplus
Deadweight loss
Economic efficiency
Economic surplus
Marginal benefit
Marginal cost
Price ceiling
Price floor
Producer surplus
Tax incidence
K e y T e r m s