[ECON 201] Chapter 7
Terms in this set (28)
the study of how the allocation or resources affects economic well-being.
-examining the benefits that buyers and sellers receive from engaging in market transactions
-examine how society can makes these benefits as large as possible
-In any market, the equilibrium of supply and demand maximizes the total benefits received by all buyers and sellers combined
willingness ot pay
-how much that buyer values the good.
-any buyer would be eager to buy the album at a price less than his willingness to pay, and he would refuse to buy the album at a price greater than his willingness to pay
-at same level, buyer would be indifferent
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
the buyer who would leave the market first if the price were any high
Demand curve and consumer surplus
the area below the demand curve and above the price measures the consumer surplus in the market
Lower price on Demand Curve
buyers who were already buying Q1 of the good are better off because they are paying less, and more buyers enter the market. This increases the consumer surplus and quantity demanded of overall product
the amount a seller is paid minus the cost of production. It measures the benefit sellers receive from participating in a market
Producer Surplus and Supply Curve
The area below the price and above the supply curve measures the producer surplus in a market. The logic is straightforward: the height of the supply curve measure sellers' costs, and the difference between the price and the cost of production is each seller's producer surplus. Thus, the total area is the sum of the producer surplus of all sellers
the seller who would leave the market first if the price were any lower
Higher Price Raises Producer Surplus
Sellers who were already selling Q1 of the good at lower price P1 are better off because they now get more for what they sell. Some new sellers enter the market because they are willing to produce the good at a higher price, resulting in an increase in the quantity supplied from Q1 to Q2.
sum of consumer and producer surplus or
total surplus= value to buyers-cost of sellers
the property of a resource allocation of maximizing the total surplus received by all members of society
eg. an allocation is inefficient if a good is not being produced by the sellers with lowest cost
eg.if a good is not being consumed by the buyers who value it most highly
the property of distributing economic prosperity uniformly among the members of society
efficiency vs. equality
efficiency is how big the pie is and equality concerns how the pie is slice and how the portions are distributed among members of society
(1) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay
(2) Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost
(3) Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus
When the value to the marginal buyer exceeds the cost to the marginal seller
any quantity below the equilibrium level, if increased quantity produced and consumed raises total surplus
when the value to the marginal buyer is less than the cost to the marginal seller
any quantity beyond the equilibrium level, decreasing quantity raises total surplus,
"leave to do" the policy of leaving well enough alone goes by the French expression
when a single buyer or seller may be able to control market prices. Market power can cause markets to be inefficient because it keeps the price and quantity away from the levels determined by the equilibrium of supply and demand
side effects that influence the market besides the buyers and sellers
eg. externalities and market power
the inability of some unregulated markets to allocate resources efficiently
Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much at $300 for the massage, but they negotiate a price of $200. In this transaction,
consumer surlus is $20 larger than producer surplus.
The demand curve for cookies is downward sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises to $3, what happens to consumer surplus?
It falls by less than $100
John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Emily enters the market and begins tutoring as well. how much does producer surplus rise as a result of this price increase?
between $100 and $200
An efficient allocation of resources maximizes
consumer surplus plus producer surplus
When a market is in equilibrium, the buyers are those with the _____ willingness to pay, and the sellers are those with the _____ costs.
Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay is
positive but less than the marginal seller's cost.
the production of goods and services according to individual demand
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