the measure of welfare of consumers.

the difference between the amount a buyer is willing to pay for a good and the amount actually paid for it.

CS= (willingness to pay)-(price)

Consumer surplus-

price change: price decreases

-additional CS for buyers already in the market

- CS for buyers who enetered the market because new price equals or is less than WTP

the measure of pruducers welfare.

the difference between the price the seller recieves for a good and the cost of producing it.

Producers Surplus-

Price change: Price increase

-Additional PS to sellers already in the market

-PS to sellers who have entered market because new price is less than costs

a legal maximum on the price at which a good can be sold

EX. in 1970s price of oil high so governemnt imposed price ceiling on gas, rent control

price placed above equilibrium

market will end up back at equilibrium

price placed below P*

results in shortage

a legal mimimum pon the price at which a good can be sold

EX. Minimum wage

price placed below P*

results in equilibrium

price above P*

results in surplus, prevents market from reaching equilibrium

Price Control- ceilngs and floors

Taxes- on buyers and sellers

Effects on the market by taxing the seller-

(2)

1. Reduces market activity from Q* to Qtax

2. Creates a wedge of the price buyers pay and the price the sellers receive.

Effects on market when tax on buyer

(2)

1. Market activity decreses from Q* to Qtax

2. Tax creates a wedge between the price of buyers and price of sellers

the price the buyer payes with taxes is higher than P* so buyers consume less

Qtax < Q*

The price seller recieves is less than P*, sellers produce less

Qtax < Q*

how consumers and producers share the burden of the tax

difference between:

Pbuyer and P*

Pseller and P*

the amount of money the firm recieves from the sale of its output

TR= price x quantity

the market value of inputs (labor, time, materials) a firm uses in production

opportunity costs

requires an outlay of money by the firm

Ex. wages, price of materials, rent, interest paid

DOES NOT require outlay of money

Ex. quit job earning $35/hr

forgone wages, opp cost of financial capital (lost interest of money pulled from bank)

the output produced from each additional worker

MP= (outp.2- outp.1)/ (workers2-workers1)

property whereby the marginal product of an input declines as quantity of the input increases

primary example of overcrowding of the workplace

cost that does not vay with quantity of output produced

ex. rent for a shop

cost that does vary with the quantity of output produced

ex. wages

1. many buyers and sellers

2. identical product= results in buyers and sellers being price takers

3. free entry and exit 

1. one firm, many buyers

2. unique product- no close substitutes avaliable

3. price maker

4. high barriers to entry/exit

1. monopoly resources-key resource is owned by one firm

2. government created monopolies- gov. gives one firm the exclusive right to produce some good

3. natural monopolies- cost of the reproduction are so high that it makes more sense to have single producer (utilities)