Supply and Demand: Welfare Markets

Question 1

allocation of resources (3 things)

Answer 1

1. how much of each good is produced
2. which producers produce it
3. which consumers consume it

Question 2

what does welfare economics study

Answer 2

how the allocation of resources influences people’s well-being

Question 3

WTP

Answer 3

willingness to pay

Question 4

willingness to pay

Answer 4

the maximum amount a buyer will pay for a good

Question 5

what does WTP effect

Answer 5

quantity demanded (Qd)

Question 6

what shape is a WTP vs. quantity demanded curve

Answer 6

staircase

Question 7

how does the staircase shape change in large markets?

Answer 7

becomes smooth

Question 8

what does the height of the demand curve represent

Answer 8

WTP of the marginal buyer

Question 9

marginal buyer

Answer 9

buyer who would leave the market if P were higher

Question 10

consumer surplus

Answer 10

amount a buyer is willing to pay minus the amount they actually pay

Question 11

consumer surplus formula

Answer 11

CS = WTP - P

Question 12

how is CS related to the demand curve

Answer 12

CS = area under demand curve above price from 0 to Q (quantity)

Question 13

2 ways higher price reduces CS

Answer 13

1. buyers leaving market

2. remaining buyers pay higher P

Question 14

cost

Answer 14

value of everything a seller must give up to produce a good

Question 15

what does cost include

Answer 15

all resources used to produce a good, including value of seller’s time

Question 16

when will sellers produce something

Answer 16

only if the price exceeds their cost to produce it

Question 17

what is cost a measure of

Answer 17

willingness to sell