Week 3

Question 1

The Competitive Supply Curve

Answer 1

The Competitive Supply Curve = The Marginal Cost of Production
Consider the marginal cost of production for a single firm in the market.
Because we have a competitive market, this firm will be a price taker.
The marginal cost curve shows us the cost of producing the last unit of output
We only use the upward sloping part of the MC curve to determine supply.

There is a special case for when the marginal cost of production is the same for each unit produced (the MC curve is a straight line)
As a result, the price and quantity is determined by demand.

Question 2

Consumer Surplus

Answer 2

The difference in the price consumers are willing and able to pay and the market price.
This can be visualised by the the area between the demand curve and the price (triangle)

Therefore, by calculating the area of this triangle we can identify consumer surplus.

Question 3

Producer Surplus

Answer 3

The difference in the price producers are willing and able to accept and the market price.
This can be visualised by the the area between the supply curve and the price (triangle)

Therefore, by calculating the area of this triangle we can identify producer surplus.

Question 4

Changes in Consumer and Producer Surplus due to Price Controls

Question 5

Supply/Demand Shifts

Answer 5

Supply Rises - Price Falls - Quantity Rises
Supply Falls - Price Rises - Quantity Falls
Demand Rises - Price Rises - Quantity Rises
Demand Falls - Price Falls - Quantity Falls
Supply Rises+Demand Rises - Price Depends - Quantity Rises
Supply Rises+Demand Falls - Price Falls - Quantity Depends
Supply Falls+Demand Rises - Price Rises - Quantity Depends
Supply Falls+Demand Falls - Price Depends - Quantity Falls

Question 6

Price Control

Answer 6

There are many examples, past and current, of governments controlling the prices on goods and services.
Price ceilings
* University tuition (price cap).
* Price caps on bread during wartime.
* Price caps on rent and housing.
Price floors
* Minimum agriculture price.
* Minimum wage

Question 7

Calculating DWL

Answer 7

DWL- a cost to society that results from market inefficiency, or when supply and demand are not in equilibrium.

Use information in the question to find the equilibrium and sketch the diagram
Use the diagram to visualise the DWL triangle after the price control is introduced, and work out the appropriate values on the axis by subbing in known values to the equation.
Use the area of triangle formula (2 right angled triangles) to calculate the DWL.