Flashcards: Demand Supply and Market Welfare — 41 cards

What is a buyer's valuation V in trade?

The cutoff point below which the buyer wants to trade.

How is the buyer's gain from trade calculated?

It is V minus P.

What is a seller's cost C in trade?

The cutoff point above which the seller wants to trade.

How is the seller's gain from trade calculated?

It is P minus C.

What is the formula for total gain from trade?

Total gain is $V-C$.

How is total gain from trade related to buyer's and seller's gains?

It equals buyer's gain plus seller's gain.

What is the buyer's gain formula?

Buyer's gain is $V-P$.

What is the seller's gain formula?

Seller's gain is $P-C$.

What does the demand curve show?

The quantity buyers want to purchase at each price.

How does the demand curve slope?

It slopes down.

What does the supply curve show?

The quantity sellers want to sell at each price.

How does the supply curve slope?

It slopes up.

What are the six buyer valuations in the example?

700, 700, 600, 400, 400, and 300.

What are the seven seller costs in the example?

100, 100, 200, 300, 450, 600, and 700.

What is market equilibrium?

The price and quantity where quantity supplied equals quantity demanded.

What equation defines equilibrium in a market?

Equilibrium satisfies $S=D$ at price $P^*$ and quantity $Q^*$.

What is consumer surplus in economics?

The area under the demand curve and above the price line.

How is consumer surplus calculated mathematically?

As total valuation minus expenditure: $CS=v(Q)-P Q$.

What does producer surplus represent graphically?

The area above the supply curve and below the price line.

How is producer surplus calculated mathematically?

As revenue minus total cost: $PS=P Q-c(Q)$.

What defines the marginal valuation of the Qth unit?

The change in total valuation from one additional unit.

How is marginal valuation expressed mathematically?

$mv(Q)=\frac{dv(Q)}{dQ}=v(Q)-v(Q-1)$.

What defines the marginal cost of the Qth unit?

The change in total cost from one additional unit.

How is marginal cost expressed mathematically?

$mc(Q)=\frac{dc(Q)}{dQ}=c(Q)-c(Q-1)$.

What does the market price maximize in economic activity?

Total surplus.

Why are markets considered efficient for organizing economic activity?

Because the market price maximizes total surplus.

What is total surplus in a market?

The sum of consumer surplus and producer surplus.

What is the demand equation in the numerical example?

Demand is $Q=120-2P$.

What is the supply equation in the numerical example?

Supply is $Q=P$.

How does a per-unit tax on sellers affect the supply curve?

It shifts the supply curve up by the tax amount.

How does a per-unit tax on buyers affect the demand curve?

It shifts the demand curve down by the tax amount.

What effect does a per-unit sales tax have on gains from trade?

It causes unrealized gains from trade.

How does a per-unit sales tax affect total welfare?

It reduces total welfare through deadweight loss.

How is the unregulated equilibrium found with demand $Q_d=50-P$ and supply $Q_s=0.5P-10$?

By setting $Q_d=Q_s$ to solve for price and quantity.

What is a price floor in regulation?

A regulated minimum price.

What can a price floor cause when set above equilibrium?

A surplus.

What is a price ceiling in regulation?

A regulated maximum price.

What can a price ceiling cause when set below equilibrium?

A shortage.

How does a tariff on imported raw sugar affect a generic soft drink's market?

It raises input costs, shifting supply.

How does Coca-Cola and Pepsi's advertising affect the generic soft drink market?

It makes branded products more attractive, shifting demand.

What do supply and demand shifts from tariffs and advertising affect in the generic soft drink market?

The equilibrium price and quantity.