Flashcards for:
Understanding Economic Surplus and Deadweight Loss

Total economic surplus is the sum of producer and consumer surpluses, and may include tax and tariff revenues, maximized at allocative efficiency where marginal benefit equals marginal cost.

Deadweight loss is identified on a graph as the area of a triangle with points at marginal cost, marginal benefit, and equilibrium.

Overproduction causes deadweight loss by producing more than the equilibrium quantity, leading to inefficiencies and wasted resources.

Producer surplus is the difference between the marginal cost of production and the product price. It is calculated by summing individual producer surpluses and graphically as the area between the price and the supply curve up to the equilibrium quantity.

Allocative efficiency maximizes economic surplus because it ensures that the marginal benefit equals the marginal cost, optimizing resource allocation.

Utility maximization in consumer surplus occurs when consumers purchase goods as long as the marginal benefit is greater than or equal to the marginal cost.

Market equilibrium occurs at the price where quantity demanded equals quantity supplied, represented graphically by the intersection of the supply and demand curves.

In a market, if the price is above equilibrium, there is a surplus causing prices to fall; if below, there is a shortage causing prices to rise until equilibrium is reached.

Marginal benefit in consumer surplus is the additional value or satisfaction gained from consuming one more unit of a good or service, influencing consumer decisions.

Consumer surplus can be calculated as the area of a triangle: 1/2 * base * height, where the base is the equilibrium quantity and the height is the difference between value and price.

Deadweight loss is the reduction in economic surplus due to deviation from equilibrium, caused by surplus or shortage when prices are above or below equilibrium.

Supply and demand determine the market equilibrium price and quantity, where the supply curve intersects the demand curve.

Taxes and tariffs can be included in economic surplus calculations as they affect overall price and quantity, thereby impacting producer and consumer surpluses.

When the market price is above equilibrium, there is a surplus, leading to a fall in prices as there is more supply than demand.

Consumer surplus is the difference between the value to the consumer and the price paid. Graphically, it is represented as the area between the demand curve and the price, up to the equilibrium quantity.