Consumers, producers and market efficiency Flashcards
Define willingness to pay (WTP)
The maximum amount of money that a buyer will pay for a good
Define consumer surplus
The buyer’s willingness to pay for a good minus the amount the buyer actually pays for it
When would a customer buy a good?
When its price is lower than WTP
Define market demand
The sum of all individual demands for a particular good or service
How do you find the total consumer surplus?
Add the consumer surpluses together
What do lower prices do to the consumer surplus?
Lower prices raise the consumer surplus
Where is the consumer surplus on a graph?
It is the area above the price and below the demand curve
What are the two parts of an increased consumer surplus?
Additional consumer surplus to initial consumers (rectangle)
Consumer surplus to new consumers (triangle at the side of the rectangle)
What happens as the price declines?
Demand increases
What does consumer surplus measure?
The benefit that buyers receive from a good as the buyers themselves perceive it
Is customer surplus always a good measure of economic well-being?
Depends whether consumers are rational or irrational
What does consumer reflect in most markets?
Economic well-being
Define producer surplus
The amount a seller is paid for a good minus the seller’s cost
When are sellers willing to produce a good?
When the price is higher than the cost
Define market supply
The sum of all individual supplies for a particular good or service
What is the height of the supply curve related to?
The supplier’s cost
How can you find the producer surplus?
It is the area above the supply curve and below the price
What is the marginal seller?
The seller who would leave the market first of the price were any lower
what is the marginal buyer?
The buyer who would leave the market first if the price were any higher
What does the price given by the demand curve at any quantity show?
The willingness to pay of the marginal buyer
What does the price given by the supply curve at any quantity show?
The marginal seller
What does the concept of producer surplus show?
The increase in well-being of a producer in response to a higher price
What are the two parts that occur as a result of an increase in producer surplus?
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
How can you find the additional producer surplus to initial suppliers on the supply curve?
It is the rectangle between P1 and P2
How can you find the producer surplus to new producers on the supply curve?
It is the triangle at the side of the rectangle
What does the area below the price and above the supply curve measure?
The producer surplus in a market
What does a higher price do to producer surplus?
A higher price raises producer surplus
Define total surplus
consumer surplus + producer surplus
Define efficiency
The property of a resource allocation of maximising the total surplus
Where is the consumer surplus found on a graph?
It is the area below the demand curve and above the price
Where is the producer surplus found on a graph?
The area below the price and above the supply curve
How can you measure total surplus in a supply-demand diagram?
It is the total area between the supply and demand curves up to the point of equilibrium
What are 3 important factors about market equilibrium outcomes?
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
Define equity
The fairness of the distribution of well-being among the various buyers and sellers
What type of allocation does the equilibrium outcome provide?
An efficient allocation of resources
What does the efficient allocation of resources mean?
The market can be left as it is found
