Customer and Producer Surplus

Question 1

What are the three possible ways a central planner can mess with the market and what is entailed in each?

Answer 1

Re-allocating consumption – preventing certain consumers from purchasing the products even if they are willing to pay far more than the asking price

Re-allocating sales among sellers – preventing sellers from making sales in the market for those who whose minimum selling price was too large for the market naturally

Change the quantity transaction – force a consumer and producer who normally would not have transacted to make the transaction, causing at least one of the two parties to become worse off

Question 2

What is a central planner?

Answer 2

A central planner is the person in a planned economy that makes all of the transaction decisions

Question 3

What is a planned economy?

Answer 3

A planned economy is one where a person or group of people determine how certain transactions are going to play out, regardless how efficient their decision is.

Question 4

What is a free market economy?

Answer 4

A free market economy is where there is no one controlling the sales. Producers and consumers naturally make exchanges that benefit them both, providing an efficient economy (as long as the market doesn’t fail)

Question 5

To be efficient, should we mess with the market a lot?

Answer 5

No. Generally speaking, markets will naturally reach peak efficiency on their own. If you mess with them too much, you risk losing that efficiency

Question 6

If the CS and PS are equal, what type of efficiency can be seen with that market?

Answer 6

If the CS and the PS are equal, we can tell that that market is productive (supply), allocative(demand), and pareto efficient(overall)

Question 7

What is economic surplus used for?

Answer 7

Economic surplus can help us determine the welfare of consumers (how much people benefit from the market), and how efficient a market is

Question 7

What is the formula for economic surplus?

Answer 7

CS+PS = total surplus/economic surplus

Question 8

What is economic surplus?

Answer 8

Economic surplus if the total sum of producer and consumer surplus

Question 9

Can you have any producer or consumer surplus if there is no transaction?

Answer 9

No. To have this surplus, the MUST be a transaction. if there isn’t one, it is considered to have 0 surplus

Question 10

What are some reasons for a producer to be a marginal producer?

Answer 10

A producer could be a marginal producer because they are inefficient or something else has a more profitable opportunity cost (like planting soybeans instead of corn because farmers are predicted to get more from soybeans this year)

Question 11

What are marginal producers?

Answer 11

Marginal producers are just like marginal consumers. Marginal producers either leave or enter the market when the price changes.

Question 12

What are incumbent producers?

Answer 12

Incumbent producer are like incumbent consumers. They are producers that were originally in the market and remained after the price was changed

Question 13

On the graphical model, how can we tell if a producer is willing to sell an item?

Answer 13

We know a producer is willing to sell their product if they fall on or below the price threshold and on or above the supply curve

Question 14

In the case of producer surplus, what specifically do we mean by “opportunity cost?”

Answer 14

In the case of producer surplus, the opportunity cost is the cost of production (looking for the most profitable item)

Question 15

What is the formula for producer surplus?

Answer 15

PS = Price - OC

Question 16

What is producer surplus?

Answer 16

Producer surplus is the difference the price of an item and the opportunity cost

Question 17

What are incumbent consumers?

Answer 17

Incumbent consumers are consumers that were previously in the market and remain when the price changes.

Question 18

What are marginal consumers?

Answer 18

Marginal consumers are consumers that either leave or enter the market depending on the changes in price.

Question 19

What it the choke price?

Answer 19

The choke price is the highest price anyone is willing to purchase. Above that and you would not have any consumers

Question 20

On the graphical model, what type of curves do we use and what do they signify (most common)?

Answer 20

We can use a line that looks like stairs, which allows us to distinctly see who much consumer surplus a person has and when you can’t purchase a fraction of an item. We can also look at a linear line, which, while not as distinct as the stair, shows the consumer surplus when purchasing things with a large quantity

Question 21

With the use of a graphical model, how do we determine if a person is willing to purchase an item?

Answer 21

We base it on where the equilibrium lies, specifically p*. If they are above the equilibrium on the demand curve, their willingness to pay is higher, which means they will purchase the item

Question 22

What is the formula for consumer surplus?

Answer 22

CS = WTP-Price

Question 23

What is consumer surplus?

Answer 23

Consumer surplus is the difference between a consumers willingness to pay (WTP) and the price

Question 24

In the case of consumer and producer surplus, what is meant by surplus?

Answer 24

Our willingness to pay (or the payment we are willing to receive) is usually different from what we actually pay (are paid)