1.

refers to the difference between the value of the good to the consumer and the price he pays for
it.
2. The consumer surplus is the area __ the demand curve and __ the market price.
3. The __ indicates the willingness of the consumer to pay for the good.
4. If he pays less than what he is willing to pay, he gets a ___or___
5. The __ the market price, the higher is the corresponding consumer surplus.
6. There 2 factors influencing the consumer surplus
7. consumption of some goods such as prohibited drugs, the consumers surplus may not be a good
indicator of welfare.
8. consumer surplus is not a good indicator of welfare because the drug addicts are not looking
after their own best interests.
9. is the difference between how much the seller is paid for the good and the cost of producing the
good.
10. It is the area above the supply curve and below the market price.
11. The producer surplus depends on two factors
12. Given the market price for the good, sellers who incur higher costs in the production of the good
receive a __ producer surplus
13. Given the cost of production, the higher the market price sellers receive for the good, the __ is
the producer surplus.
14. Note that the cost of production incurred by the producers cover the costs of the inputs plus
normal profit
15. which is the reward for engaging in production/entrepreneurial activities.
16. Since a purely competitive seller has no control over the price of the good, but he can extract
higher producer surplus by being

17. is the sum of the consumer surplus and the producer surplus.
18. It is the difference between the value attached by the consumers to the product less its cost of
production.
19. means that the allocation of resources attain the maximum total surplus.
20. Market Inefficiency occurs in two ways:
21. The good is not produced in the least possible cost
22. The good does not go to the consumers who are willing to pay the highest price.
23. Solutions nyan both

1. Loss in __ surplus when the price changed from $5 to $6

2. Loss in __ surplus when the price changed from $5 to $6
3. Total deadweight loss =
4. In reality however, there is a inequality in the distribution of income.
5. Hence, if those with high income have higher value attached to a product, while those with low
income have lower value attached to a product, the economic resources will go to the
production of the goods desired by the rich (e.g. dog milk treat) rather the goods desired by the
poor (children’s milk).
6. Hence, we give attention to the inability of the market forces to promote equity
7. Economists however believe that the objective of attaining equity should be separate from the
objective of promoting market efficiency.
8. When we rely on market forces, sometimes the price becomes disadvantageous to consumers or
sometimes disadvantageous to the sellers.
9. – refers to the maximum price set by the government on selected items to make the goods more
affordable.
10. is set below the market equilibrium price. Examples include price control on basic commodities
in areas affected by calamities.
11. – refers to the minimum price set by the government to provide a higher price for the sellers of
the good.
12. is set above the market equilibrium price. Examples NFA buying price of palay is higher than the
buying price of regular palay trader.
13. Condition 1 = Market forces at work
Market clears at a price of Po. Quantity demanded is equal to quantity supplied at Qo.
Consumer surplus = __
Producer surplus = __
Deadweight loss = __
14. Condition 2: Price ceiling is imposed
Price is now P1. Quantity is now Q1
__ surplus = area A + area B + area D
__ surplus = Area F
Transferred from producer to consumer = area
Deadweight loss = area C and area E
Negative effect: __
15. Condition 3: Price floor or subsidy is imposed
Price is now P2. Quantity is now __
__ surplus = area A
__ surplus = Area F + area D + area B
Transferred from consumers to producers = area __
Deadweight loss = area C and area E
Negative effect = __
Note: I expect that you know the formula of the area for triangles and rectangles.

1. “Collecting more taxes than is absolutely necessary is legalized robbery.” Calvin Coolidge
2. A per unit tax “t” paid by the supplier __ his cost of production and __ his supply.
3. Here the supply shifted to the left from So to S1.
4. Equilibrium price increased from Po to P1 and equilibrium quantity is reduced from Qo to
Q1.

5. Consumer surplus before the tax is area __ after the tax is imposed, the consumer surplus is
now area __
6. Producer surplus before the tax is area __. The seller receives P1 but after paying the tax, he
is left with __. Thus the new producer surplus after the tax is area __
7. The government collects the tax equal to area __
8. Deadweight loss is area __.
9. This refers to the reduction in consumer surplus (C) because the consumer now pays more
and consumes less. The producer surplus (E) was reduced because although he receives P1,
he is only left with P1-t after paying the tax. The deadweight loss (C+E) is the cost of not
being able to produce more of the desired goods (misallocated resources).
10. The less elastic is the demand, the greater is the proportion of the tax burden of the ___
11. Republic Act No. 10351 or the ___ was amended by Republic Act No. 11346 and Republic
Act No. 11467.
12. 80% shall be allocated to (1) Universal Health Care (UHC) expenditures under the National
Health Insurance Program (NHIP), (2) Sustainable Development Goals (MDGs) and (3)
health awareness programs.
13. The 20% shall be allocated nationwide to political and district subdivisions, for medical
assistance, and Health Enhancement Facilities Program (HEFP).
14. Target reduction in smoking is 15% by 2022.
15. The proposed tax is Php3 per stick or Php60 per pack

1. Fraction of the tax borne by the consumers =

2. to compute the tax borne by the consumers, the numerator is the __
3. Fraction of the tax borne by the suppliers =
4. Note: to compute the tax borne by the sellers, the numerator is the __
5. Note: use the absolute coefficients so both price elasticity of demand and supply are
positive
6. Without the price ceiling, the equilibrium price is Po and the equilibrium quantity is Qo.
With price ceiling, the price received by the sellers is the same as the price paid by the
consumers which is P1 and the new quantity is Q1. This is like taxing the sellers (area D)
which is given as subsidy to the consumers. Take note of the deadweight loss equal to
area C+E
7. Without the price floor, the equilibrium price is Po and the equilibrium quantity is Qo.
With price floor, the effective price is P2 and the quantity is Q1.
This is like taxing the consumers (area B) and giving this area to the producers.
Take note of the deadweight loss equal to the area C+E
8. The equilibrium price is Po, equilibrium quantity is Qo.
The government wants to help the farmers so it sets the price of palay at P2 > Po. Sellers
want to sell Q2 but only Q1 is purchased by palay traders. The surplus Q2-Q1 should be
bought by the government.
The government wants to provide the consumers with affordable rice. But the sellers are
only willing to sell Q1 at the price of P1. The shortage Q2-Q1 should be sold by the
government6
9. Assume that a tax is imposed such that the consumers pay P2 while the seller receives
P1, the tax paid per unit is P2-P1.
Without the tax, the consumers demand is Qo. With the tax, the consumers demand is
Q1. With the tax, there is no shortage because both the consumers and sellers decide to
consume and sell Qo.
With price ceiling, the consumers want more (Q2) while the producers want to sell less
(Q1), thus there is a shortage equal to Q2-Q1.
The imposition of price controls or taxes may also lead to the creation of black markets.
Consumers lobby for price ceilings while producers lobby for price floors and they spend
resources to unproductive activities to make sure that they get what they want. This is
called rent-seeking.
10. We tend to believe that when the farmers produce more, it becomes beneficial to them.
For example, an improvement in the technology may shift the supply curve to the right.
However, if the producers were able to sell more but the prevailing price is reduced too
much, the total revenues received by the producers may be __
11. This happens when the demand for the good is price inelastic. An increase in the supply
enables the producers to sell more quantity (area B) but they also realize losses due to
the reduction in price (area A)
12. The producers may have the incentive to restrict the supply because the gain (area A) >
loss (area B). The more price inelastic the demand, the greater is the gain of the
producers in restricting the supply.