Chapter 7 - Consumers, Producers, and the Efficiency of Markets

Question 1

Welfare Economics

Answer 1

Allocation of resources affects economic well-being

Question 2

Buyers maximum

Answer 2

A buyers maximum price that they are willing to pay measures their value of a good.

Question 3

Consumer Surplus (CS)

Answer 3

Is the price a buyer is willing to pay minus the price they actually paid. It is the “benefit” of the sale.

The area below the demand curve but above the price measures consumer surplus.

measures the benefit the buyer receives as they perceive it

not always a good measure of benefit (drug dealers getting better price for drugs is not beneficial)

Question 4

Demand Curve (CS)

Answer 4

Because there are so many buyers in the market the demand curve in terms of CS smooths out

Question 5

Producer Surplus

Answer 5

Is the amount the seller is paid minus the price of their service.

This measures the benefits of participating in the market for sellers

it is measured by the area above the supply curve but below the price

Question 6

Marginal Consumer and Producer

Answer 6

Consumer - someone who buys at the market price and not more (at the margin)

Producer - someone who provides goods or services at their value and nothing less

Question 7

Total Surplus

Answer 7

The sum of consumer and producer surplus

TS = Value to Buyers - Cost to Sellers

If the allocation of resources is maximizing the total surplus then it is efficient

Question 8

Laissez Faire

Answer 8

Means leaves things be

The efficiency of the market is dependent on the market forces, it determines equilibrium natrually