Demand, supply and market efficiency (normative economics)

• Consumer surplus: The difference between the maximum amount a person is willing to pay for a good and its current market price.

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D

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• Producer surplus: The difference between the current market price and the full cost of production for the firm.

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p

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S

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• Competitive markets maximize the sum of producer and consumer surplus.

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Discussion:

- Who does really pay the taxes?

- Price ceilings (e.g. rent controls)

- Price floors (e.g. min. wage)