Chapter 7 - Consumers, producers, and the efficiency of markets Flashcards
What is Welfare economics?
The study of how the allocation of resources effect economic well-being.
The study of welfare economics begins by looking at the benefits buyers receive from participating in the market.
What is “Willingness to Pay”?
The maximum amount that a buyer will pay for a certain good.
What is Consumer Surplus?
A buyer’s willingness to pay minus the amount the buyer actually pays.
How do you calculate consumer surplus?
The area below the demand curve and above the price measures the consumer surplus in a market.
Thus, the total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or services.
What exactly does consumer surplus measure?
Measure the benefit that buyers receive from a good as the buyers themselves perceive it. Which is why consumer surplus is a great measure of economic well-being in the market.
What is Cost and Producer surplus?
Cost - is the value of everything a seller must give up to produce a good. (i.e., the producers’ opportunity cost.)
Producer Surplus - the amount a seller is paid for a good minus the seller’s cost.
How do you measure producer surplus?
the area above the supply curve and below the price measure the producer surplus in a market.
Thus, the total area is the sum of the producer surplus of all sellers.
Who is a benevolent social planner?
A person who is all-knowing, all-powerful, well-intentioned dictator.
This planner wants to maximize the economic well-being of everyone in society and maximize the total surplus.
A benevolent social planner would often care a lot of efficiency and equity.
Market Efficiency?
Free markets will allocate the supply of goods to the buyers who value them most highly, as measure by their willingness to pay.
Free markets allocate the demand for goods to the sellers who can produce them at the lowest price.
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
The invisible hand’s role in market efficiency?
the invisible hand takes all the information about buyers and sellers into account and guides everyone in the market to the best outcome as judged by the standard of economic efficiency.
