Chapter 7- Consumers, Producers, & the Efficiency of Markets Flashcards
Welfare Economics
the study of how the allocation of resources affects economic well-being
Willingness to Pay
the maximum amount that a buyer will pay for a good
Consumer Surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
-profit/gain
Marginal Buyer
the buyer who would leave the market first if the price were any higher
For all demand curves…
Consumer surplus
the area below the demand curve and above the price measures the consumer surplus in the market
Increase in consumer surplus is composed of two parts
1) Buyers who were already buying Q1 of the good at the higher P1 are better off because they now pay less
2) New buyers enter the market because they are willing to buy the good at the lower price
Cost
the value of everything a seller must give up to produce a good
Producer Surplus
the amount a seller is paid for a good minus the seller’s cost of providing it
This applies to all supply curves:
Producer surplus
the area below the price and above the supply curve measures the producer surplus in a market
Total Surplus
Value to buyers - Cost to sellers
Efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
Equality
the property of distributing economic prosperity uniformly among the members of society
Total Surplus on a graph
the total area between the supply and demand curves up to the point of equilibrium represents the total surplus in the market
Advocated by economists as the best way to organize economic acvitivty
Free Markets