chapter 3 from class part 1: review of surplus and shortage Flashcards
buyer’s willingness to pay for a good
the maximum amount the buyer will pay for that good
WTP measures how much the buyer values the good
the marginal buyer
the buyer who would leave the market if P were any higher
basically, I the demand curve, the buyer who is not willing to pay if the price just gets a bit higher
there is a marginal buyer is at any height or price of the demand curve
consumer surplus
the amount a buyer is willing to pay minus the amount the buyer actually pays
CS = WTP – P
consumer surplus will increase everytime price lowers
consumer surplus decreases everytime price increases
Suppose P = $260
Mamadou is WTP 300
what is the consumer surplus
consumer surplus is $40
if mamadou WTP $300
if Chad WTP $175
if Nicholas Gurr WTP $250
if Ben Dover WTP $125
the price is $200, what will be the quantity demanded?
quantity demanded is 2
total consumer surplus
area under the demand curve above the price
from 0 to Q
why does the total consumer surplus decrease if price increases?
there are more buyers leaving the market
cost
the value of everything a seller must give up to produce a good
all resources used to produce good, including value of the seller’s time
how is cost a measure of a supplier’s willingness to sell?
A seller will produce and sell the good/service only if the price exceeds his or her cost
marginal seller
the seller who would leave the market if the price were any lower
producer surplus
the amount a seller is paid for a good (its price)minus the seller’s cost
what is the total producer surplus?
the area above the supply curve under the price
from 0 to Q
total surplus
CS + PS
total gains from trade in a market
(value to buyers) – (cost to sellers)
why do we use total surplus?
as a measure of society’s well-being
to see whether the market’s allocation is efficient
when is an allocation fo resources efficient?
if it maximizes total surplus
