ECON 1100 Global Economics (Fall 2013) Surplus, Efficiency, and Deadweight Loss

Transcription

1 ECON 11 Global Economics (Fall 213) Surplus, Efficiency, and Deadweight Loss Relevant Readings from the Required Textbooks: Economics Chapter 5, Surplus, Efficiency, and Deadweight Loss Definitions and Concepts: consumer s surplus a measure of the net gain that a buyer realizes from making a purchase, equal to the difference between his reservation for the item and the he actually pays for the item. producer s surplus a measure of the net gain that a seller realizes from making a sale, equal to the difference between the she actually receives for the item and her reservation for the item. social surplus a measure of the net gains to society from a trade, equal to the summation of the individual gains (or losses) from the trade over all members of society. total social surplus a measure of the total gains from trade realized by society, defined as Social Surplus, added over all units traded. total consumers surplus a measure of the total gains from trade realized by all consumers, defined as each individual s Consumer s Surplus, added over all units purchased. total producers surplus a measure of the total gains from trade realized by all sellers, defined as each individual s Producer s Surplus, added over all units sold. efficient level of trade the level of trade which maximizes Total Social Surplus deadweight loss the difference between maximum possible Total Social Surplus and realized Total Social Surplus. by construction, Deadweight Loss is zero at the efficient level of trade and is positive at any other level of trade. open-ended fallacy a logical error whereby someone incorrectly concludes that simply because there are benefits (to some people) from higher levels of an activity, that more of the activity is always better.

2 Maximum Total Social Surplus and Inefficiency of too much or too little trade : To maximize Do trade all units for which ( r b r s ) (or equivalently rb rs ) Do not trade any units for which ( r b r s ) (or equivalently rb rs ) Maximum possible Social Surplus Social Surplus Maximizing or Efficient Level of Trade Any other level of trade (either higher or lower) leads to a smaller realized value of Total Social Surplus. Inefficiency from too little trade : Inefficiency from too much trade : Realized Social Surplus equal to orange area DWL equal to black area Realized Social Surplus equal to orange area minus black area DWL equal to black area Level of Trade below Efficient Level Level of Trade above Efficient Level

3 Equilibrium Price serves to define the split of total gains from trade between buyers and sellers under the market equilibrium outcome: Total Consumers Surplus ( green area ) *** Total Social Surplus ( green area plus purple area ) *** Equilibrium Price Total Producers Surplus ( purple area ) Efficient Level of Trade, as well as Equilibrium Level of Trade

4 Multiple Choice Questions: 1. Deadweight Loss refers to A. the negative impact of industrial production on our scarce environmental resources. B. the difference between maximum possible Total Social Surplus and realized Total Social Surplus. C. the profits that firms make in a free market economy. D. the burden that consumers incur from having to pay for goods, instead of being given the goods for free. 2. Ty owns a copy of the book The Economic Naturalist: In Search of Explanations for Everyday Enigmas, autographed by the author Robert Frank. His reservation as a seller of this item is $7. Bob s reservation as a buyer of this item is $6. If this unit was traded (i.e., transferred from Ty to Bob) A. Social Surplus would be decreased by $1. B. Social Surplus would be increased by $1. C. Social Surplus would be increased by $13. D. Social Surplus would be increased, but the magnitude of the increase depends upon the at which trade takes place. 3. The refers to the logical error whereby someone incorrectly concludes that simply because there are benefits (to some people) from higher levels of an activity, that more of the activity is always better. A. Invisible Hand B. Economic Calculation Problem C. Open-Ended Fallacy D. Phillips Curve 4. Consider a market in which the efficient level of trade is 5,25 units. There would be a positive Deadweight-Loss if units were traded. A.. B. 4,5. C. 7,75. D. More than one (perhaps all) of the above answers are correct. 5. Dave bought 1 comic books from Eric. This trade gave Eric a Producer s Surplus of $2 and generated a Social Surplus of $36. It follows that Dave realized a from this trade. A. negative Consumer s Surplus B. Consumer s Surplus of $16 C. Consumer s Surplus of $56 D. None of the above answers are correct.

5 6. In most markets Total Social Surplus is equal to A. Total Consumers Surplus plus Total Producers Surplus. B. Total Consumers Surplus minus Total Producers Surplus. C. Total Benefit to Buyers minus Total Amount Paid by Buyers. D. Equilibrium Price multiplied by Equilibrium Quantity. For questions 7 and 8, refer to the graph below. This graph illustrates the supply and demand for hats in (a) (b) (c) (d) (e) (f) (g) (h) 213 1,67 3,33 4, In equilibrium A. both Total Producers Surplus and Total Consumers Surplus are zero. B. both Total Producers Surplus and Total Consumers Surplus are positive. C. Total Producers Surplus is positive, but Total Consumers Surplus is zero. D. Total Consumers Surplus is positive, but Total Producers Surplus is zero. 8. If 1,67 units were traded, Deadweight-Loss would be A. negative. B. equal to area (g). C. equal to area (e) plus area (f). D. equal to area (g) plus area (h).

6 Answers to Multiple Choice Questions: 1. B 2. A 3. C 4. D 5. B 6. A 7. B 8. C