Economics Concepts: Demand, Surplus, Taxes, and Market Efficiency

Posted on Mar 21, 2025 in Economy

Economics Concepts Explained

Consumer Surplus: The difference between willingness to pay and the actual amount paid.
Example 1: Priscilla is willing to pay $65, Patty $50; shoes cost $45. Total consumer surplus: $20 ($65-$45 + $50-$45).
Example 2: Jung is willing to pay $85, Eddi $65; jacket costs $70. Total consumer surplus: $20 ($85-$70 + $65-$70).

Equity of a Tax: Primarily concerned with elasticity.
Tax Impact: The difference between the price consumers pay and the price sellers receive is the tax amount.
Excise Tax: Applied to a specific good or service.
Price Increase: Taxes almost always increase consumer prices; the extent depends on the tax amount.
Lost Surplus: Tax imposition leads to lost consumer and producer surplus, becoming tax revenue and deadweight loss.
Government Taxation: Tax revenue plus deadweight loss equals total lost social welfare.
Minimizing Deadweight Loss: Tax goods with very inelastic demand.
Long-Run Effects: As supply and demand become more elastic, deadweight loss from a tax increases.

Efficient Combination: The price-quantity intersection of supply and demand curves maximizes total surplus.
Externalities: Costs or benefits of a market activity affecting a third party.
Social Cost: Includes personal decisions of consumers and firms.
External Costs: Costs paid by individuals not engaged in the market activity.
Efficient Market: Requires external costs to be paid.
Source of External Costs: Actions of firms and consumers.
Example: Silvia, a concert pianist, practicing at home creates a free-rider problem or tragedy of the commons for roommates.
Negative Externality: Exists when production creates an external cost.

Profit Calculation: Total revenue minus total cost.
Explicit Costs: Always paid out of pocket.
Example 1: Total costs $535k, implicit costs $165k; explicit costs are $370k.
Example 2: Maria’s pizza restaurant: $100k revenue, $3k rent, $2k employee pay. Explicit costs: $66k.
Example 3: Lissette’s bakery earns zero economic profit, $145k revenue, $12k rent. Explicit costs: $53k.
Implicit Costs: Difficult to measure because business owners can’t always observe them directly.

Price Taker: A firm has no control over the price.
Not a Characteristic: Sellers having better information than consumers.
Example: Farmers markets.
Zero Profit: Due to easy market entry and exit.
Example: Broccoli farm produces 35 crates where marginal revenue equals marginal cost. Total profit/loss: -$175k.
Profit Maximization: Point C corresponds to the profit-maximizing quantity.
Total Revenue: Represented by the area (A-B)xC.
Production Adjustment: If marginal cost is $15 and marginal revenue is $12, decrease production.