Week 5 and 6 (chapter 7 8 9)

Question 1

What is Welfare economics?

Answer 1

Welfare economics is the study of how the allocation of resources affects economic wellbeing.

For example, the study of welfare economics
helps to answer the question: What is the ‘right’
price for a good? Eg – what is the right price to
pay for flowers? Welfare economics will explain
how markets will come up with the balance so
that buyers and sellers the best price

Question 2

What is Willingness to pay (Ability to pay)?

Answer 2

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

For example, the demand curve illustrates the
willingness to pay of the buyers in a market.

Question 3

Consumer surplus

Answer 3

Question 4

Willingness to pay for a collectable album

(Example)

Answer 4

Willingness to pay for a collectable album
• Suppose that you have one album to sell.
• To sell your album, you begin the bidding at a
low price, say $10.
• Because all four buyers are willing to pay much
more, the price rises quickly, stopping when
John bids $80.
• What benefit does John gain from purchasing
the album for $80?
• John’s willingness to pay for the album is $100.
• The price he actually pays is $80. So his
consumer surplus is $20.

Question 5

1/ What are the characteristics of a competitive market?
2/ Which of the following drinks do you think is best
described by these characteristics?

a/ Tap water
b/ Bottled water
c/ Cola
d/ Beer

Answer 5

1/ – allocates the supply of goods to the buyers who value
them most highly
– allocates the demand for goods to the sellers who can
produce them at lowest cost
– produces the quantity of goods that maximises the
sum of consumer and producer surplus.

2/ Tap water. It is homogeneous product which can find everywhere so that the many buyer and seller condition will not be a problem.On the contrary, B,C and D are branded and have market power.

Question 6

Cost

Answer 6

Cost is the value of everything a seller must give
up to produce a good.

Question 7

Producer surplus

Answer 7

Producer surplus is the amount a seller is paid
for a good minus the seller’s cost.

For example, producer surplus is a measure of
the benefits that sellers receive from
participating in a market.

Question 8

Taxes

Answer 8

Taxes are controversial – some level necessary for
funding government expenditure

Question 9

Deadweight loss

Answer 9

Deadweight loss – the reduction in total surplus that
results from a market distortion such as tax or a
monopoly price