Outline the concept of market efficiency in a perfectly competitive market
Efficiency means producing the goods that society wants at the lowest possible cost.
An efficient outcome means that it is not possible to make someone better off without making someone worse off
Explain the concepts of consumer surplus, producer surplus, total surplus and deadweight loss
Consumer Surplus
The demand curve is a willingness to pay curve - it reflects the maximum price a consumer is prepared to pay for a particular good.
The difference between what the consumer is prepared to pay and what they actually pay is the consumer surplus ($CS$)
In the demand curve, below the equilibrium is consumer expenditure, and above is consumer surplus.
At its core, consumer surplus is a measure of the economic wel l-being for consumers.
Producer Surplus
The supply curve reflects the minimum price that producers are willing to sell their products
Then, the difference between what a producer is willing to receive and what they actually receive is producer surplus ($PS$)
In the supply curve, producer surplus is above the curve and below the equilibrium, and cost of production is below the curve
At its core, if producer surplus rises in a market, then this indicates that producers are happier
Total Surplus
Total Surplus is the measure of the net benefits to society from the production and consumption of a good. It is equated $TS = PS+CS$
The aim of society should be to increase $TS$ in every market - it is an extremely important concept because it provides us with a measure of market efficiency.
Outline the efficiency of market equilibrium i.e. maximising total surplus
Discuss how under- and overproduction in a market can result in a deadweight loss
When $TS$ is reduced because of either under or overproduction, it is referred to as deadweight loss
A deadweight loss refers to an avoidable decrease in $TS$ because something has prevented the market from producing the optimal output. An example could be monopoly.
To minimise $DWL$ is the role of government, though some government policies can reduced economic efficiency, as detailed in the next heading.
Demonstrate and explain the effects of a tax and subsidy on a market
Governments levy taxes on goods and services in order to raise revenue for government spending programs.
This decreases the supply curve, shifting it to the left
In doing so, a DWL is created from the original to the new supply curve, and tax revenue is equal to the magnitude of the shift.
Demonstrate and explain the effects of a price ceiling and price floor on a market