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

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

3. 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…

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

5. Surpluses at Equilibrium
Graph like this…

6. 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

7. 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…

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

9. 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?

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

11. 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…

12. 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

13. 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