EC102EconomicsB Class6
Week7/MT 09.11.2015
SamiraBarzin
[email protected]
samirabarzin.jimdo.com
OfficeHoursEC102:Mon10:30–11.30
(32L1.30)
EC102
Class6:Q1
SamiraBarzin
ConsidertheperfectlycompeRRveequilibrium
representedinthefollowingfigure:
Inthisfigureconsumersurplus,
producersurplus,totalbenefits
derivedfromconsumpRonand
totalsurplusarerespecRvely
representedasareas:
a)  A,B,A+B+C,A+B
b)  A,B,A+B,A+B+C
c)  B,A,A+B+C,A+B
d)  B,A,A+B-C,A+B
EC102
Class6:Q1
SamiraBarzin
ConsumerSurplus
Theconsumersurplusisthedifferencebetweentheconsumer’smaximalwillingnesstopayandthe
actualmarketprice.Iftheconsumervaluesthegoodatapricehigherthanthemarketprice,the
consumer’ssurpluswillbeposiRve.Graphicallythisisrepresentedbythetriangleunderthedemand
curveabovethemarketprice.
TotalBenefitsfromConsumpRon
Totalamountaconsumeriswillingtopayforagood,thiscanalsobedefinedasthevaluethe
consumerplacesonconsumingthegood.Graphicallythisisrepresentedbythewholeareaunderthe
demandcurveuptotothemarketequilibriumquanRty.
ProducerSurplus
Theproducersurplusisthedifferencebetweentheminimumpriceatwhichafirmiswillingtosellthe
goodandtheactualmarketprice.Ifthefirmiswillingtosellthegoodatapricelowerthanthemarket
pricethentheproducer’ssurpluswillbeposiRve.Graphicallythisisrepresentedbythetriangleabove
thesupplycurveunderneaththemarketprice.
TotalBenefits
Totalbenefitsarethesumofthesurplusesofthedifferenteconomicagents.Theagentsmost
commonlyincludedineconomicmodelsareconsumers,producersandthegovernment.
EC102
Class6:Q1
SamiraBarzin
ConsumerSurplus
Graphicallythisisrepresentedbythetriangleunderthedemandcurveabovethemarketprice,inour
examplethisisareaA.
TotalBenefitsfromConsumpRon
Graphicallythisisrepresentedbythewholeareaunderthedemandcurveuptotothemarket
equilibriumquanRty,inourexamplethisisareaA+B+C.
ProducerSurplus
Graphicallythisisrepresentedbythetriangleabovethesupplycurveunderneaththemarketprice,in
ourexamplethisisareaB.
TotalBenefits
Totalbenefitsarethesumofthesurplusesofthedifferenteconomicagents.Inourexamplewehave
theagentsofproducersandconsumers,sothesumoftheconsumerandproducersurplusisA+B.
EC102
Class6:Q1
SamiraBarzin
ConsidertheperfectlycompeRRveequilibrium
representedinthefollowingfigure:
Inthisfigureconsumersurplus,
producersurplus,totalbenefits
derivedfromconsumpRonand
totalsurplusarerespecRvely
representedasareas:
a)  A,B,A+B+C,A+B✔
b)  A,B,A+B,A+B+C✖
c)  B,A,A+B+C,A+B✖
d)  B,A,A+B-C,A+B✖
EC102
Class6:Q2
SamiraBarzin
ConsidertheperfectlycompeRRveequilibriumrepresentedinthe
followingfigure:
WhenquanRtyreducesfromXhtoX1,
a)  totalbenefitofconsumpRonincreases
b)  totalbenefitofconsumpRon
decreases
c)  totalcostofproducRonincreases
d)  totalcostofproducRondecreases
e)  totalsurplusincreases
f)  totalsurplusdecreases
g)  totalsurplusismaximised
EC102
Class6:Q2
SamiraBarzin
TotalBenefitfromConsumpRon
ThetotalbenefitfromconsumpRonismeasured
bytheareaunderthedemandcurve.Aswemove
fromXatoX1totalbenefitfromconsumpRon
increasesbyareaG+F,aswemovefromX1toXh
thetotalbenefitfromconsumpRonincreasesby
areaI.
TotalCostofProducRon
ThetotalcostofproducRonismeasuredbythe
areaunderthesupplycurveasthesupplycurve
showstheminimumpriceatwhichthefirmis
willingtosellthegood.AswemovefromXatoX1,
thetotalproducRoncostsincreasebyareaF,as
wemovefromX1toXhthetotalproducRoncosts
increasebyareaJ+I.
EC102
Class6:Q2
SamiraBarzin
MovingfromXhtoX1
•  TotalbenefitfromconsumpRonreducesby
areaI
•  TotalcostsofproducRonreducebyareaJ+I
•  Totalsurplusincreases:TheproducRoncosts
outweighthetotalbenefitsfromconsumpRon
atpointXh(J+I>I),byreducingthecostsin
excessofbenefits,totalsurplusisincreased.
TotalsurplusatpointX1:ifwemovefromanypointtothelefofX
1towardsX1totalsurplus
increasesasthetotalbenefitsfromconsumpRonarealwaysinexcessofthetotalcostsof
producRon,sothereisanincenRvetoincreaseoutput.AtanypointtowardstherightofX1
producRoncostsoutweighthebenefitfromconsumpRon,sotheincenRveistoreducethe
quanRty.OnlyatpointX1thereisnoincenRvetochange,henceX1maximisestotalsurplus.
EC102
Class6:Q2
SamiraBarzin
WhenquanRtyreducesfromXhtoX1,
a)  totalbenefitofconsumpRonincreases
✖
b)  totalbenefitofconsumpRondecreases
✔
c)  totalcostofproducRonincreases✖
d)  totalcostofproducRondecreases✔
e)  totalsurplusincreases✔
f)  totalsurplusdecreases✖
g)  totalsurplusismaximised✔
EC102
Class6:Q3
SamiraBarzin
Considertheeffectsofintroducingasalestaxinaperfectly
compeRRvewinemarketasdepictedinthefollowingfigure:
SandS’arethesupplycurvesbeforeandafertheintroducRonof
thesalestax.Whichofthefollowingstatementswouldbecorrect?
a)  ThetaxisrepresentedbytheverRcal
distancebetweenSandS‘
b)  Thetaxisrepresentedbythehorizontal
distancebetweenS‘andS
c)  Thetaxburdenisborneonlybythe
sellergiventhatitisasalestax
d)  Thetaxburdenissharedbyboththe
buyersandthesellers
e)  Thetaxburdenisborneonlybythe
buyerseventhoughitisasalestax
EC102
Class6:Q3
SamiraBarzin
AsalestaxisaconsumpRontaxongoodsand
services.Theconsumerpaysthepriceoftheproduct
+theamountoftax,thenthetaxamountis
forwardedtothegovernment.
Fortheconsumer:thepriceofthegoodincreasedby
theamountt.Forafixedtaxtheafertaxprieisp+t
progressivetaxtheafertaxpriceis(1+t)pwherepis
thepret-taxpriceandtisthetaxrate.Foranypre-tax
pricep,theconsumerhasnowtopayp+t,sothe
effecRvepricehasincreased,sothesupplycurve
shifsup(thisdoesnotmeanthattheproducerhave
increasedproducRoncosts).Thedemandcurveis
unaffectedasthedemandcurverepresentsthe
quanRtydemandedatdifferentpricelevels,
importantisherethatthisisthefinalpricethe
consumerpays,independentlyifitincludesataxor
not.
EC102
Class6:Q3
SamiraBarzin
Ifbothconsumerandproducersurplusareaffected
bythetax,thenthetaxburdenissharedbetween
bothconsumersandproducers.Generally,ifdemand
andsupplyareneitherperfectlyinelasRcorelasRc
thenthetaxburdenissharedbetweentheeconomic
agents.
Beforethetax,consumersurplusisthetriangley-interceptofthedemandcurve-e1-p1,afer
thetaxtheconsumersurplusisthetriangley-interceptofthedemandcurve-e2-p2.Thepretaxproducersurplusisthetriangley-interceptofthesupplycurveS-e1-p1,aferthetaxthe
producersurplusisthetriangley-interceptofthesupplycurveS‘-e2-p2.Bothproducerand
consumersurplushavebeenreducedbythetax,thetaxburdenissharedbetweenthem.
Theconsumersurplusisreducedasconsumerspayahigherpriceandhencebuyless,the
producersurplusisreducedasproducerssellless(theysRllreceivethesameprice).
EC102
Class6:Q3
SamiraBarzin
Considertheeffectsofintroducingasalestaxinaperfectly
compeRRvewinemarketasdepictedinthefollowingfigure:
SandS’arethesupplycurvesbeforeandafertheintroducRonof
thesalestax.Whichofthefollowingstatementswouldbecorrect?
a)  ThetaxisrepresentedbytheverRcal
distancebetweenSandS‘✔
b)  Thetaxisrepresentedbythehorizontal
distancebetweenS‘andS✖
c)  Thetaxburdenisborneonlybythe
sellergiventhatitisasalestax✖
d)  Thetaxburdenissharedbyboththe
buyersandthesellers✔
e)  Thetaxburdenisborneonlybythe
buyerseventhoughitisasalestax✖
EC102
Class6:Q4
SamiraBarzin
SupposethehousingmarketinLondonisperfectlycompeRRve.
Considertheeffectsofintroducingasalestaxonthemarketbythe
Londongovernmentasdepictedinthefollowingfigure:
SandS’arethesupplycurvesbeforeandafertheintroducRonof
thesalestax.Whichforthefollowingstatementswouldbecorrect?
a)  Duetothesalestax,producersurplusis
lower
b)  Theconsumersurpluswouldnotchange
sincethetaxisonthelandlords
c)  Duetothesalestax,consumersurplusis
lower
d)  Thedeadweightlosscreatedbythetaxis
representedbyareaC
e)  Thedeadweightlosscreatedbythetaxis
representedbyareaE
EC102
Class6:Q4
SamiraBarzin
ConsumerSurplus
Beforethetax,consumersurplusisthetriangleyinterceptofthedemandcurve-e1-p1,aferthetaxthe
consumersurplusisthetriangley-interceptofthe
demandcurve-e2-p2(seequesRon3).
ProducerSurplus
Thepre-taxproducersurplusisthetriangley-intercept
ofthesupplycurveS-e1-p1,aferthetaxtheproducer
surplusisthetriangley-interceptofthesupplycurveS‘e2-p2(seequesRon3).
Deadweightloss
Thepre-taxtotalsurplusisareaA+B+C+E(consumer+producersurplus),thepost-tax
totalsurplusisA+B+C(consumer+producersurplus+tax),bothproducerandconsumer
surplushavebeenreduced,areaChasbeenredistributedtothegovernment,butareaE
leavesthesurpluscompletelyandislost,hencethisisadeadweightlosscreated.
EC102
Class6:Q4
SamiraBarzin
SupposethehousingmarketinLondonisperfectlycompeRRve.Considerthe
effectsofintroducingasalestaxonthemarketbytheLondongovernmentas
depictedinthefollowingfigure:
SandS’arethesupplycurvesbeforeandafertheintroducRonofthesalestax.
Whichforthefollowingstatementswouldbecorrect?
a)  Duetothesalestax,producersurplusis
lower✔
b)  Theconsumersurpluswouldnotchange
sincethetaxisonthelandlords✖
c)  Duetothesalestax,consumersurplusis
lower✔
d)  Thedeadweightlosscreatedbythetaxis
representedbyareaC✖
e)  Thedeadweightlosscreatedbythetaxis
representedbyareaE✔
EC102
Class6:Q5
SamiraBarzin
MarketFailureis:
a)  AsituaRoninwhichaneconomywithfreelyoperaRng
marketsmayfailtogenerateanefficientallocaRonof
resources
b)  AsituaRoninwhichaneconomywithregulatedmarkets
mayfailtogeneratedanefficientallocaRonofresources
c)  AsituaRoninwhichaneconomywithfreelyoperaRng
marketsmayfailtogenerateafairallocaRonofresources
d)  AsituaRoninwhichaneconomywithregulatedmarkets
mayfailtogenerateafairallocaRonofresources
EC102
Class6:Q5
SamiraBarzin
Whendoesamarket“work”?
Anmarketworkswhenitprovidesanefficientoutcome,thismeansit
maximisestotalsurplusanditgeneratesanefficientresourceallocaRon
(resourcesareallocatedtothoseagentsthatvaluethemthemost).A
funcRoningmarketprovidesaparetoopRmaloutcome,sothatany
deviaRonfromthisoutcomecannotmakeanyeconomicagentbemeroff.
Whendoesamarket“fail”?
TherearevariousissuesthatcanpreventamarketfromgeneraRngan
efficientoutcome.Afewexamplesare:
•  wageandpricecontrols
•  publicgoodsandexternaliRes
•  Monopolies,oligopolies
EC102
Class6:Q5
SamiraBarzin
MarketFailureis:
a)  AsituaRoninwhichaneconomywithfreelyoperaRngmarkets
mayfailtogenerateanefficientallocaRonofresources✔
b)  AsituaRoninwhichaneconomywithregulatedmarketsmay
failtogeneratedanefficientallocaRonofresources✖
c)  AsituaRoninwhichaneconomywithfreelyoperaRngmarkets
mayfailtogenerateafairallocaRonofresources✖
d)  AsituaRoninwhichaneconomywithregulatedmarketsmay
failtogenerateafairallocaRonofresources✖
EC102
Class6:Q6
SamiraBarzin
HereisareportfromtheBBC:
“HundredsofthousandsofUKfamilieswillbeaffectedbythe
cutsof£12bnintheUK’swelfarebudgetannouncedbythe
chancellorinJuly2015.ForthefirstRmetaxcreditsandfamily
benefitsunderUniversalCreditwillbelimitedtothefirsttwo
childrenonly.Atthemoment870,000familieswithmorethan
twochildrenclaimtaxcredits,accordingtoHMRC.Thebenefit
capwillbereducedfrom£26,000ayearto£23,000ayearin
London,and£20,000intherestofthecountry”
EC102
EC102
Class6:Q6
Class6:Q6
SamiraBarzin
SamiraBarzin
ThelabourpartyleaderJamesCorbynquesRonedDavid
CameronduringthePrimeMinister’sQuesRonson28October
whetherhecouldguaranteethatUKfamilieswithmorethan
twochildrenwouldn’tbeworseoffaferthecutsinthetax
credits.DavidCameronrepliedthattheUKwouldbenefit
morefromalowerwelfare,highwageandhighgrowth
economy.
Doyousupportthecutsontaxcredits?Why?