Chapter 5 - Efficiency Flashcards
What is efficiency?
Maximizing total surplus
What is surplus?
The best way to look at the benefits people receive from successful transactions and by how much
Willingness to pay (reservation price)
The max price that a buyer would be willing to pay for a good or sevice
Willingness to sell
The min price that a seller is willing to accept in exchange for a good or service
Consumer surplus
The net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price
Producer surplus
The net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer’s willingness to sell and the actual price
Total surplus
A measure of the combined benefits that everyone receives from participating in an exchange of goods or services
Zero-sum game
A situation in which whenever one person gains, another loses an equal amount, such that the net value of any transaction
Efficient market
An arrangement such that no exchange can make anyone better off without someone becoming worse off
Deadweight loss
A loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity
