Chapter 5 - Efficiency Flashcards
maximum willingness to pay is..
the maximum the consumer would pay
- demand curve
minimum willingness to sell
the minimum price producers will accept and sell their products for
- supply curve
What is surplus?
the benefit that people receive when they buy something for less than they would have been willing to pay or sell something for more than they would have been willing to accept.
What is consumer surplus?
the difference between willingness to pay and what is actually paid
What is producer surplus?
net benefit that a producer receives from the sale of a good or service, measured by the difference between willingness to sell and the actual price
What is total surplus?
the combined benefits that everyone receives from participating in an exchange of goods or services
- maximized at the market equilibrium price and quantity
consumer surplus + producer surplus
What is market equilibrium?
the point that maximizes total well-being (total surplus) of all participants in the market.
- when it is at equilibrium: there is no exchange that can make anyone better off without someone becoming worse off.
What is deadweight loss?
the loss of total surplus that results when the quantity of a good that is bought and sold is below the market equilibrium quantity.
How do you calculate deadweight loss?
subtract total surplus after a market intervention from total surplus at the market equilibrium before the intervention
(area of cut off triangle thing)
What does a “market is missing” refer to?
when there are people who would like to make exchanges but cannot, and opportunities for mutual benefit do not occur.
