Chapter 8: Consumer and Producer Surplus

Question 1

What is welfare economics?

Answer 1

Welfare economics examines the economic well-being that society receives from a market, distinct from government welfare payments.

Question 1

What is willingness to pay?

Answer 1

Willingness to pay is the maximum price a buyer is willing to pay for a good, reflecting its value to them.

Question 2

How is consumer surplus calculated?

Answer 2

Consumer surplus is calculated as the difference between what buyers are willing to pay and what they actually pay.

Question 3

What does the demand curve represent?

Answer 3

The demand curve represents buyers’ willingness to pay, with higher prices leading to lower quantities demanded.

Question 4

How can total consumer surplus be visualized graphically?

Answer 4

Total consumer surplus is the area under the demand curve and above the market price.

Question 5

What happens to consumer surplus when prices fall?

Answer 5

Consumer surplus increases because existing buyers benefit from lower prices and new buyers enter the market.

Question 6

What is the formula for calculating the area of a triangle?

Answer 6

Area of a triangle = ½ × base × height.

Question 7

How does consumer surplus measure economic benefits?

Answer 7

Consumer surplus measures the net benefit to consumers in monetary terms, allowing for objective measurement of consumer welfare in markets.

Question 8

What is producer surplus?

Answer 8

Producer surplus is the net benefit that sellers receive from participating in a market.

Question 9

What does a seller’s cost include?

Answer 9

A seller’s cost includes all opportunity costs, such as the value of time and resources given up to sell a good or service.

Question 10

What is “willingness to sell”?

Answer 10

It is the minimum price that sellers are willing to accept for their product, equal to or above their opportunity cost.

Question 11

When will a seller participate in a market?

Answer 11

A seller will participate only if the price they receive is higher than their willingness to sell.

Question 12

What is a marginal seller?

Answer 12

The marginal seller is the first seller to exit the market when prices start to fall.

Question 13

How is producer surplus calculated?

Answer 13

Producer surplus is the amount sellers are paid minus their willingness to sell.

Question 14

What does the supply curve represent?

Answer 14

The supply curve represents the willingness to sell for all sellers at various price points.

Question 15

How do higher prices affect producer surplus?

Answer 15

Higher prices increase producer surplus by raising the surplus for existing sellers and attracting new sellers into the market.

Question 16

How is total producer surplus represented on a graph?

Answer 16

It is the area under the price line and above the supply curve.

Question 17

What is total surplus in a market?

Answer 17

Total surplus is the sum of consumer and producer surplus, reflecting the total economic well-being from a market.

Question 18

How do free markets achieve efficiency?

Answer 18

By allocating goods to buyers who value them most and production to sellers with the lowest costs.

Question 19

What quantity maximizes total surplus?

Answer 19

The equilibrium quantity, where supply and demand intersect.

Question 20

Can efficient markets be inequitable?

Answer 20

Yes, efficiency does not imply equity, and total surplus does not consider distribution fairness.

Question 21

Why might free markets not always be efficient?

Answer 21

Market failures or lack of competition can prevent efficient outcomes.