Chapter 5 (2) Flashcards
Surplus is a way of measuring who benefits from transactions and by how much
► “if you get something for less than you would have been willing to pay or sell it more than the minimum you would have accepted”
–> that’s a good thing.
► Think about how nice it feels to buy something on sale that you would have been willing to pay full price for
► Surplus: the “bonus” value that you would have paid if necessary, but didn’t have to
SURPLUS
is the difference between the price at which the buyer/seller = would be WILLING to trade & the actual price
Willingness to pay
► price at which someone = completely indifferent between buying an item and keeping her money
Higher price: she would prefer to keep the money
Lower price: she would prefer to buy!
By looking at the distance between the INDIFFERENCE point & the actual price –> we can describe the extra value the buyer (or seller) gets from the transaction
**It turns out that surplus = a better measure of the value that buyers & sellers get from participating in a market than price itself.
CONSUMER SURPLUS
► The difference between one’s willingness to pay & the actually amount one pays.
► When one buys nothing & pay nothing: surplus is 0
► We can add up each individual’s consumer surplus to describe the overall benefits that buyers receive in a market
○ You should be able to tell from the context whether we mean one person’s consumer surplus or total consumer surplus for all buyers in the markets
► (IF) the market for digital cameras only consisted of our five individuals –> than the total consumer surplus would be:
$340 + $90 + $40 + $0 + 0 = $470.00
How does a change in the market price affect buyers?
► Decrease in prices: makes them better off
Increase in prices: makes them worse off
► some people = choose not to buy at all - surplus = 0
► those who buy will have a smaller individual surplus than they had at the lower price
–> the opposites is true when prices fall
*Measuring consumer surplus = tells us how much better or worse off buyers are when the price changes
► The more that a buyer = would have been willing to pay, the greater the surplus (excess) at lower price
► basically, when the price level falls –> the area representing consumer surplus gets bigger
PRODUCER SURPLUS
► net benefit that a producer receives from the sale of a good/service –> measured by the difference between willingness to sell & the actual price
► It’s called producer surplus regardless of whether the sellers actually produced the good themselves OR are selling it second-hand (i.e., eBay).
A change in the market price affects sellers in the opposite way it affects buyers
► Sellers would always prefer prices to be higher –> so a decrease in price = makes them worse off
○ When prices fall: some will choose to no sell; surplus becomes zero
► Those who do sell (when prices fall) - will have a smaller individual surplus than at the higher price
► The opposite = true when the market price rises –> which makes sellers better off!
**Measuring producer surplus: tells us HOW MUCH better or worse off sellers are when the price changes!
TOTAL SURPLUS
► We now understand how to calculate consumer surplus & producer surplus at any given price
○ But what will the actual market price be?
► To find out: we have to put the demand & supply curves together & locate the point where they intersect
Surplus at Market Equilibrium
is the point where demand & supply curves intersect
Consumer surplus
represented by the area between the demand curve & the market price
Producer surplus
equal to the area between the supply curve & the market price
Total consumer surplus
represented graphically by the area underneath the demand curve & above the equilibrium price (area shaded gold
Total producer surplus
represented by the area of the graph ABOVE the supply curve and BELOW the equilibrium price (area shaded blue)
Added together, these two areas
consumer surplus & producer surplus = make up the total surplus created.
TOTAL SURPLUS
is a measure of the combined benefits that everyone receives from participating in the exchange of goods/services
► We can also think of total surplus as value created by the existence of the market
Total surplus is calculated: by adding up the benefits that every individual participant receives
► But these benefits = exist only as a result of their participation in exchanges in the market
zero-sum game (idea)
This is an important point, because sometimes people = mistakenly think of the economy as a fixed quantity of money, goods, and well-being–in which the only question is how to divide it up among people
ZERO-SUM GAME
is a situation in which whenever one person gains; another loses an equal amount–such that the net value of a transaction = zero
Example: poker; whatever one player wins, another person, logically, has to lose
The concept of surplus shows us that the economy = generally does not work like a poker game
► Voluntary transactions –> like selling cameras on eBay = do not have a winner or loser
► Rather, both the buyer & seller are winners –> since they both gain surplus
► Everyone = ends up better off than they were before
► Total surplus = cannot be LESS than zero–if it were, people would simply stop buying & selling
**as a rule, markets = generate value –> but the distribution of that value is a more complicated issue.
