Chapter 5 (2)

Question 1

Surplus is a way of measuring who benefits from transactions and by how much

Answer 1

► “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

Question 2

SURPLUS

Answer 2

is the difference between the price at which the buyer/seller = would be WILLING to trade & the actual price

Question 3

Willingness to pay

Answer 3

► 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!

Question 4

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

Answer 4

**It turns out that surplus = a better measure of the value that buyers & sellers get from participating in a market than price itself.

Question 5

CONSUMER SURPLUS

Answer 5

► 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

Question 6

How does a change in the market price affect buyers?

Answer 6

► 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

Question 7

*Measuring consumer surplus = tells us how much better or worse off buyers are when the price changes

Answer 7

► 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

Question 8

PRODUCER SURPLUS

Answer 8

► 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).

Question 9

A change in the market price affects sellers in the opposite way it affects buyers

Answer 9

► 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!

Question 10

TOTAL SURPLUS

Answer 10

► 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

Question 11

Surplus at Market Equilibrium

Answer 11

is the point where demand & supply curves intersect

Question 12

Consumer surplus

Answer 12

represented by the area between the demand curve & the market price

Question 13

Producer surplus

Answer 13

equal to the area between the supply curve & the market price

Question 14

Total consumer surplus

Answer 14

represented graphically by the area underneath the demand curve & above the equilibrium price (area shaded gold

Question 15

Total producer surplus

Answer 15

represented by the area of the graph ABOVE the supply curve and BELOW the equilibrium price (area shaded blue)

Question 16

Added together, these two areas

Answer 16

consumer surplus & producer surplus = make up the total surplus created.

Question 17

TOTAL SURPLUS

Answer 17

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

Question 18

zero-sum game (idea)

Answer 18

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

Question 19

ZERO-SUM GAME

Answer 19

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

Question 20

The concept of surplus shows us that the economy = generally does not work like a poker game

Answer 20

► 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.