COLEGIO DE LA PURISIMA CONCEPCION

The School of the Archdiocese of Capiz

Roxas City

College of Business, Management and Accountancy

BA 1 – BASIC MICROECONOMICS
First Semester 2020-2021

Name: LIRA S BALASABAS

Activity 6

Research on the following:

1. What is consumer surplus? How is it related to the demand curve?

Answer: Consumer Surplus is the amount a buyer is willing to pay minus the amount the
buyer actually pays for it. It measures the benefit buyers receive from participating in the
market.
The area below the demand curve and above the price.
(Measures the consumer surplus in a market)

2. What is producer surplus? How is it related to the supply curve?

Answer: Producer Surplus is the amount sellers receive for a good minus the seller's cost
of providing it. It measures the benefit sellers receive from participating in a market.
The area below the supply curve and above the supply curve.
(Measures the producer surplus in a market)

3. Do markets produce a desirable allocation of resources? Or could the market outcome be

improved upon?
Answer: Yes, the forces of supply and demand allocate resources efficiently. They are
led together by an invisible hand to an equilibrium that maximizes total benefits to buyers
and sellers.
Under perfect competition the market outcome is efficient. Altering the market would
reduce total surplus. Markets do not allocate resources efficiently in the presence of
market failure and externalities.

4. How does a tax affect consumer surplus, producer surplus, and total surplus?
Answer: A tax reduces producer and consumer surplus so total surplus also reduces.
They cause buyers to buy less and sellers to sell less.

5. What is the deadweight loss of a tax?

 Answer: Deadweight loss is the fall in total surplus that results when a tax distorts
market outcome.

6. What factors determine the size of this deadweight loss?

Answer: Elasticity of supply and demand determines deadweight loss. When supply is
relatively inelastic, the deadweight loss of a tax is small. When supply is relatively
elastic, the deadweight loss of a tax is large. When demand is relatively inelastic, the
deadweight loss of a tax is small. When demand is relatively elastic, the deadweight loss
of a tax is large.

7. How does tax revenue depend on the size of the tax?

Answer: As a tax gets larger, it distorts incentives more, and its deadweight loss grows
larger. Because a tax reduces the size of a market, tax revenue does not continually
increase. It first rises with the size of a tax, but if a tax gets large enough the tax revenue
starts to fall.