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

Question 1

Define ‘Welfare economics’.

Answer 1

The study of how the allocation of resources affects economic well-being.

Question 2

Define ‘Willingness to pay’.

Answer 2

The maximum amount that a buyer will pay for a good.

Question 3

Define ‘Consumer surplus’.

Answer 3

A buyer’s willingness to pay minus the amount the buyer actually pays. Measures the benefit the buyers receive from participating in a market. Computed from area under demand curve and above price.

Question 4

Define ‘Cost’.

Answer 4

The value of everything a seller must give up to produce a good.

Question 5

Define ‘Producer surplus’.

Answer 5

The amount a seller is paid for a good minus the seller’s cost. Measures the benefit the sellers receive from participating in a market. Computed from area above supply curve and below price.

Question 6

Define ‘Efficiency’.

Answer 6

The property of a resource allocation of maximizing the total surplus received by all members of society.

Question 7

Define ‘Equity’.

Answer 7

The fairness of the distribution pf well-being among the members of society.

Question 8

How can you maximize consumer and producer surplus?

Answer 8

The equilibrium of supply and demand maximizes the sum of consumer and producer surplus. This is, the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently.

Question 9

Markets do not allocate resources efficiently in the presence of market failures. Name some.

Answer 9

Market power (small number of buyers or sellers control market price) or externalities (side effects of markets, such as pollution).