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

Question 1

What is welfare economics?

Answer 1

Welfare economics studies how the allocation of resources affects economic well-being​.

Question 2

How is consumer surplus defined?

Answer 2

Consumer surplus is the difference between the value to buyers and the amount they actually pay for a good. It represents the benefit buyers receive from a market​​.

Question 3

What is producer surplus?

Answer 3

Producer surplus is the amount sellers receive for a good minus their production costs. It measures the benefit sellers get from participating in the market​​.

Question 4

What determines market efficiency?

Answer 4

Market efficiency is achieved when total surplus (consumer surplus + producer surplus) is maximized. This occurs at the market equilibrium​​.

Question 5

What are the main causes of market failure?

Answer 5

Market failure arises due to market power (control over prices) and externalities (unaccounted side effects on others, such as pollution)​​.

Question 6

What role does the “invisible hand” play in markets?

Answer 6

The “invisible hand” refers to how individual self-interest in competitive markets can lead to an allocation of resources that maximizes societal well-being​​.

Question 7

What is total surplus?

Answer 7

Total surplus is the sum of consumer surplus and producer surplus. It measures the overall economic welfare in a market​​.