Ch7 Flashcards
Marginal buyer
At any quantity, the price given by the demand curve shows the willingness to pay of the _______ ______
Consumer surplus eqn
Willingness to pay - market price = consumer surplus
Welfare economics
The study of how the allocation of resources affects economic wellbeing
Consumer surplus
Amount a buyer is willing to pay for a good. I use the amount the buyer actually pays for it
Cost
The value of everything a seller must give up to produce a good
Producer surplus
The amount a seller is paid for a good minus the sellers cost of producing it (will be happy with 0)
What does producer surplus look like on a graph?
The area below the price and above the supply curve on a graph
Total surplus defn and equation
Measure the sum of consumer and producer surplus, value to buyers - cost to sellers
Efficiency
The property of a resource allocation of maximizing the total surplus received by all members of society (all potential gains from trade is realized)
Equality
The property of distributing economic prosperity uniformly among the pie
Free markets allocate the supply/demand of goods to the buyers/producers who…. What does this mean in terms of surplus?
Buyers who value them most (high willingness to pay) or sellers who can produce them at the lowest cost… maximized surplus
Market failure defn + 2 examples
The inability of some unregulated markets to allocate resources efficiently. Ex. Market owner and externalities
Who receives the benefits of total tax revenue? And what is the eqn for total tax revenue?
The government… Tax x Quantity sold
Deadweight loss defn
The fall in total surplus that results when a tax (or some other policy) distorts a market outcome. Occurs because buyers lose incentive to buy + sellers lose incentive ti produce…. Market shrinks below optimal
Does inelastic/elastic demand have small or large deadweight loss for the same amount of tax?
Inelastic - small, elastic - large
