Consumers, producers and market efficiency

Question 1

Define willingness to pay (WTP)

Answer 1

The maximum amount of money that a buyer will pay for a good

Question 2

Define consumer surplus

Answer 2

The buyer’s willingness to pay for a good minus the amount the buyer actually pays for it

Question 3

When would a customer buy a good?

Answer 3

When its price is lower than WTP

Question 4

Define market demand

Answer 4

The sum of all individual demands for a particular good or service

Question 5

How do you find the total consumer surplus?

Answer 5

Add the consumer surpluses together

Question 6

What do lower prices do to the consumer surplus?

Answer 6

Lower prices raise the consumer surplus

Question 7

Where is the consumer surplus on a graph?

Answer 7

It is the area above the price and below the demand curve

Question 8

What are the two parts of an increased consumer surplus?

Answer 8

Additional consumer surplus to initial consumers (rectangle)

Consumer surplus to new consumers (triangle at the side of the rectangle)

Question 9

What happens as the price declines?

Answer 9

Demand increases

Question 10

What does consumer surplus measure?

Answer 10

The benefit that buyers receive from a good as the buyers themselves perceive it

Question 11

Is customer surplus always a good measure of economic well-being?

Answer 11

Depends whether consumers are rational or irrational

Question 12

What does consumer reflect in most markets?

Answer 12

Economic well-being

Question 13

Define producer surplus

Answer 13

The amount a seller is paid for a good minus the seller’s cost

Question 14

When are sellers willing to produce a good?

Answer 14

When the price is higher than the cost

Question 15

Define market supply

Answer 15

The sum of all individual supplies for a particular good or service

Question 16

What is the height of the supply curve related to?

Answer 16

The supplier’s cost

Question 17

How can you find the producer surplus?

Answer 17

It is the area above the supply curve and below the price

Question 18

What is the marginal seller?

Answer 18

The seller who would leave the market first of the price were any lower

Question 19

what is the marginal buyer?

Answer 19

The buyer who would leave the market first if the price were any higher

Question 20

What does the price given by the demand curve at any quantity show?

Answer 20

The willingness to pay of the marginal buyer

Question 21

What does the price given by the supply curve at any quantity show?

Answer 21

The marginal seller

Question 22

What does the concept of producer surplus show?

Answer 22

The increase in well-being of a producer in response to a higher price

Question 23

What are the two parts that occur as a result of an increase in producer surplus?

Answer 23

Sellers who were already selling the good at a lower price are now better off because they now get more producer surplus for what they sell
Some new sellers enter the market because they are now willing to produce the good at the higher price, resulting in an increase in the quantity supplied

Question 24

How can you find the additional producer surplus to initial suppliers on the supply curve?

Answer 24

It is the rectangle between P1 and P2

Question 25

How can you find the producer surplus to new producers on the supply curve?

Answer 25

It is the triangle at the side of the rectangle

Question 26

What does the area below the price and above the supply curve measure?

Answer 26

The producer surplus in a market

Question 27

What does a higher price do to producer surplus?

Answer 27

A higher price raises producer surplus

Question 28

Define total surplus

Answer 28

consumer surplus + producer surplus

Question 29

Define efficiency

Answer 29

The property of a resource allocation of maximising the total surplus

Question 30

Where is the consumer surplus found on a graph?

Answer 30

It is the area below the demand curve and above the price

Question 31

Where is the producer surplus found on a graph?

Answer 31

The area below the price and above the supply curve

Question 32

How can you measure total surplus in a supply-demand diagram?

Answer 32

It is the total area between the supply and demand curves up to the point of equilibrium

Question 33

What are 3 important factors about market equilibrium outcomes?

Answer 33

Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay
Free markets allocate the demand for goods to the sellers who can produce them for the least cost
Free markets produce the quantity of goods that maximises the total surplus

Question 34

Define equity

Answer 34

The fairness of the distribution of well-being among the various buyers and sellers

Question 35

What type of allocation does the equilibrium outcome provide?

Answer 35

An efficient allocation of resources

Question 36

What does the efficient allocation of resources mean?

Answer 36

The market can be left as it is found