Chapter 4: Consumer and Producer Surplus Flashcards
KEY TERM:
Willingness to Pay
the maximum price at which a consumer is prepared to pay for a good.
KEY TERM:
Cost
(of seller) the lowest price at which a seller is willing to sell a good. Referred to as willingness to sell, production cost, opportunity cost, reservation price.
KEY TERM:
Individual Consumer Surplus
the net gain to an individual buyer from the purchase of a good; equal to the difference between the buyer’s willingness to pay and the price paid.
KEY TERM:
Individual Producer Surplus
(profit) the net gain to an individual seller from selling a good; equal to the difference between the price received and the seller’s cost.
KEY TERM:
Total Consumer/Producer Surplus
the sum of the individual consumer/producer surpluses of all the consumers/producers of a good or service in a market.
KEY TERM:
Inefficiency
describes a market or economy in which there are missed opportunities: some people could be made better off without making other people worse off.
KEY TERM:
Property Rights
the rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose.
KEY TERM:
Economic Signal
any piece of information that helps people make better economic decisions.
4 functions of market equilibrium that maximises gains from trade?
Market equilibrium is only one of the ways that achieve surpluses from gains of trade… It is usually the most efficient.
- it allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay.
- it allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost.
- it ensures that every consumer who makes a purchase values the good more than every seller who makes a sale, so that all transactions are mutually beneficial.
- it ensures that every potential buyer who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale, so that no mutually beneficial transactions are missed.
Why do markets work?
- property rights
- price as economic signals (signals consumers willing to pay equal or more and producers willing to sell equal or less)
Why don’t markets work?
- equity is prioritised.
- market failures caused by inaccuracy of price as economic signals or lack of property rights. Market failures include market power, externalities and nature of good (common resources, public goods, private information).
Allocation mechanism and intervention?
how a good is allocated to a buyer, often with a price but not always. Any form of intervention in a competitive market price allocation, whether it is forcing everyone to transact or arranging the suppliers and consumers of a transaction, will reduce total surplus.
