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| − | address student question about whether "economic rent" equals the "deadweight loss." "Economic rent" is a type of deadweight loss. Taxes can also cause deadweight loss. Define "rent seeking" behavior, a term first coined in 1967 by Tullock. Note that deadweight loss also includes the lost producer surplus.
| + | There are there lectures remaining, including this one, and then there will be our final exam. As we did last, week, we will review some important concepts first, and then learn some new ones. The review will help you prepare both for the final exam and, if you choose, the CLEP exam. |
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| − | CLEP: slightly less than 10% of the questions concern graphs. Here are some graphical questions to be able to answer:
| + | But first let's address a superb question asked by a student last week. He wondered whether the "economic rent" (the extra amount charged by a company above its costs, perhaps because it is a monopoly) is the same as the "deadweight loss." The answer is "yes": "economic rent" is a type of deadweight loss. Any time the price of a good is raised above its price in a perfectly competitive market, there will be buyers who will not pay the higher price and thus will lose out on the consumer surplus between the higher price and lower, competitive price. That loss in consumer surplus is a deadweight loss. |
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| | + | When the price is increased due to taxes, then both the buyers and the sellers lose out, and there is a deadweight loss that is even greater because it includes both a consumer surplus lost by the buyer and a producter surplus lost by the seller. So while higher prices due to monopolies are bad, higher prices due to taxes are even worse. Feel free to review the lecture and graph that discussed consumer surplus and producer surplus to understand this further. |
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| | + | To show you how recent the theories of economics are, the term "rent seeking" behavior was introduced only 40 years ago. It describes actions by firms to increase their prices and obtain economic rent above the free market, cometptitive price. Such behavior is not good for the public, because it causes a deadweight loss (lost consumer surplus). |
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| | + | With that challenging introduction, let's have our review. |
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| | + | == Economic graphs on the CLEP exam == |
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| | + | On the CLEP exam, slightly less than 10% of the questions are about graphs. To answer them correctly, it helps not to be overwhelmed or give up too quickly. The quesions simply test and retest a few basic principles in economics, such as where a monopolist sets his price: |
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| | + | :A monopolist has no supply curve, because he is the only supplier. There is only a demand curve, a marginal revenue curve, and some cost curves for a monopolist. If given a graph with these curves, simply find where the marginal revenue curve intersects the marginal cost curve, and that '''''determines the quantity''''' Here are some graphical questions to be able to answer: |
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| | *consumer surplus (only occurs where demand curve is higher than price paid, because buyers paid less than they would have) | | *consumer surplus (only occurs where demand curve is higher than price paid, because buyers paid less than they would have) |