Secrion7

Question 1

What is Consumer Surplus?

Answer 1

• Difference between a buyer’s willingness to pay and the amount they actually pay
• Measures the extra value consumers receive above what they pay for a commodity.

Question 2

How is Consumer Surplus represented on a graph?

Answer 2

Consumer surplus is the area below the demand curve and above the price level.

Question 3

What is Willingness to Pay?

Answer 3

Willingness to pay is the maximum amount a buyer is willing to pay for a good.

Question 4

What effect does a Price Reduction have on consumer surplus?

Answer 4

• Increases real income
• Allows consumers to buy more goods
• Results in an increase in welfare

I guess on could say it increases consumer surplus?

Question 5

What is the Paradox of Value?

Answer 5

The paradox of value suggests that the recorded monetary value (P * Q) of a good may not accurately reflect its total economic value.

Question 6

What is Producer Surplus?

Answer 6

• Amount a seller is paid minus the seller’s cost.
• Includes rents and economic profits (extra-profits) for firms and owners of specialised inputs.

Question 7

How is Producer Surplus represented on a graph?

Answer 7

Producer surplus is the area above the supply curve and below the price level.

Question 8

Define Total Surplus.

Answer 8

• Total Surplus (TS) = Consumer Surplus + Producer Surplus.
• Represents the total value to buyers minus the cost to sellers.

Question 9

What are the causes of Market Failure?

(5)

Answer 9

• Market power
• Externalities
• Public goods
• Asymmetric information
• Behavioural anomalies: bounded rationality, willpower, and selfishness