Microeconomics: Supply and Demand Flashcards

Consumer surplus is best described as:

Answer: The difference between what consumers are willing to pay and what they actually pay

Consumer surplus is the net benefit to buyers — the gap between their maximum willingness to pay and the market price they actually pay.

When a binding price ceiling is imposed in a market, which of the following will occur?

Answer: A shortage develops as quantity demanded exceeds quantity supplied

A binding price ceiling is set below equilibrium, keeping price artificially low so quantity demanded exceeds quantity supplied, creating a shortage.

Deadweight loss from a price ceiling represents:

Answer: The loss of total surplus (mutually beneficial trades that no longer occur)

Deadweight loss is the reduction in total economic surplus from transactions that would have been mutually beneficial but do not occur due to the price ceiling.

A per-unit tax on sellers shifts the supply curve:

Answer: Leftward by the amount of the tax

A per-unit tax on sellers increases their costs, shifting the supply curve leftward (or equivalently upward) by the exact amount of the tax.

If supply is perfectly elastic and a per-unit tax is imposed on sellers, the tax incidence falls:

Answer: Entirely on buyers

With perfectly elastic supply, sellers will not accept a lower after-tax price, so the full tax is passed on to buyers through a higher market price.

Producer surplus in a competitive market is measured as:

Answer: The area above the supply curve and below the equilibrium price

Producer surplus is the benefit producers receive — the area above the supply curve (which reflects marginal cost) and below the market price.

An effective minimum wage set above the equilibrium wage in the labor market will cause:

Answer: A surplus of workers (unemployment rises)

A minimum wage above equilibrium creates a labor surplus because quantity of labor supplied exceeds quantity demanded at the higher wage, increasing unemployment.