Chapter 4 Notes

Microeconomics Chapter 4 Eight Things to Know from Chapter 4: What two roles does the market system play in dealing with the problems of scarcity? How do these roles differ? Price Rationing and Allocation of Resources Price rationing determines allocation of goods and services among consumers when the quantity demanded exceeds the quantity supplied Allocation of resources: determines allocation of resources among producers and the final mix of outputs When the market rations the existing supply of a good, who gets it? Why might people object to the fairness to this result? The people who are willing to pay the most for the good get it ?willingness to pay? What are price ceilings and price floors? How else might goods be rationed if the market is not able to reach an equilibrium? Price ceiling: a maximum price that sellers may charge for a good, usually set by government Price floor: a minimum price below which exchange is not permitted Queuing: waiting in line as a means of distributing goods and services: a nonprice rationing mechanism Favored customers: those who receive special treatment from dealers during situations of excess demand Ration coupons: tickets or coupons that entitle individuals to purchase a certain amount of a given product per month Black market: a market in which illegal trading takes place at market-determined prices How does the market reassert itself when price ceilings or floors are imposed? When price ceilings are imposed, shortages often occur When price floors are imposed, surpluses often occur What is consumer surplus? How can you measure the consumer surplus that consumers receive from purchasing a given quantity of a good from the demand curve for that good? Understand Figure 4.6 Consumer Surplus: the difference between the maximum amount a person is willing to pay for a good and its current market price The area of the triangle under the demand curve and above the equilibrium price represents the consumer surplus What is producer surplus? How can you measure the producer surplus that producers receive from selling a given quantity of a good from the supply curve for that good? Understand Figure 4.7 Producer Surplus: The difference between the current market price and the full cost of production for the firm The area of the triangle above the supply curve and under the equilibrium price represents the producer surplus What happens to the sum of producer and consumer surplus at the equilibrium of a competitive market? The total producer and consumer surplus is greatest where supply and demand curves intersect at equilibrium What is deadweight loss? How does overproduction or underproduction (compared to the competitive equilibrium quantity) lead to deadweight loss? How can you measure the deadweight loss from overproduction or underproduction from a supply and demand diagram? Understand Figure 4.9 Deadweight loss: the net loss of producer and consumer surplus from underproduction or overproduction The resources are not being used to their fullest and most efficient capacity, so the consumer and producer surpluses fall On a supply and demand diagram, the deadweight loss is the area of the triangle between the set quantity and the equilibrium point