DO NOW!! Do you make money when you go to the store and buy things? Why do you buy then?

Consumer and Producer Surplus Why do consumers buy and sellers sell?

Consumer Surplus Benefit/utility from consuming a product minus the price  Difference between max. willingness and ability to pay (D=MB) and price Graph like this…

Producer Surplus Benefit sellers receive when selling Difference between actual price and minimum acceptable price (S=MC) Graph like this…

Surpluses at Equilibrium Graph like this…

Market Efficiencies Allocative Efficiency - Produce the set of Goods and Services most valued by society= max surplus = Socially Optimal! where D = S or MB = MC Productive Efficiency - Produce at the lowest cost

Deadweight Loss At equilibrium, allocatively and productively efficient=max surplus Gov’t intervention, nonequilibrium = less surplus = deadweight loss Let’s look at over or under production…

PF, PC and Deadweight Loss Both Price Floors and Price Ceilings create deadweight loss… Let’s see what it looks like!

DO NOW!! Lets say you really want a BMW badly and you have the money… Would you still buy one if the gov’t put a 1000 tax on it? Now what if you didn’t really want it that much, what might the dealer have to do to get you to buy?

Tax Incidence, Gov’t, Deadweight Loss When gov’t puts a tax, PC or PF, why is it inefficient? Who pays?

Taxes and Deadweight Loss Taxes increase cost of a good shift S curve UP by amount of tax Creates a Deadweight loss! Graph like this…

Tax Incidence Tax Incidence: Who pays more of the tax, buyers or sellers? Depends on relative Elasticity S, D Equally elastic = tax is split D more elastic = Sellers pay most S more elastic = Buyers pay more Perf Elastic = pay none Perf Inelastic = Pay all

Tax Incidence, DWL, Tax Rev. The more elastic both curves, the greater the change in Q as a result of the tax Further underproduction Greater DWL Smaller tax revenue