Ch. 7 Microeconomics

Laissez faire

"allow them to do" -the notion that gov't should not interfere with the market -this would be letting the buyers/sellers doing what they think is in their best interest

Efficiency

The property of resource allocation of maximizing the total surplus received by all members of society -goods are consumed by the buyers who value them most highly -the goods are produced by the producers with the lowest costs -raising or lowering the quantity of a good would not increase total surplus

Which sellers produce the good?

The sellers with the lowest cost produce the good

Welfare Economics

studies how the allocation of resources affects economic well being -this can refer to the well being of consumers as well as the well being of producers -in any market, the equilibrium of supply and demand maximizes the total benefits received by all buyers and sellers combined

Consumer Surplus on the graph

-CS is the area between price and demand curve, from 0 to Q -area of a triangle = 1/2 x base x height

Causes of Market Failures

-a buyer or seller has market power--the ability to affect the market price -transactions have side effects, called externalities, that affect bystanders (example: pollution)

Conclusion

-derived from assuming perfectly competitive markets

The Free Market vs Central Planning

-suppose resources were allocated not by the market but by a central planner who cares about society's well being -to allocate efficiently and maximize total surplus, the planner would need to know every seller's cost and every buyer's WTP for every good in the entire economy -literally impossible

What leads to a decrease in consumer surplus?

1. Fall in CS due to buyers leaving the market 2. Fall in CS due to remaining buyers paying higher P

What leads to a decrease in PS?

1. Fall in PS due to sellers leaving the market 2. Fall in PS due to remaining sellers getting lower P

Willingness to Sell

A seller will produce and sell the good/service only if the price exceeds his or her cost

PS

Amount received by sellers - cost to sellers -sellers' gains from participating in the market

WTP and The Demand Curve

As the prices increase, the willingness to pay decreases -At any quantity, the height of the demand curve is the WTP of the marginal buyer, the buyer who would leave the market if the price were any higher

CS

Consumer surplus = value to buyers - amount paid by buyers -buyers' gains from participating in the market

Cost and the Supply Curve

Cost is the value of everything a seller must give up to produce a good (i.e. opportunity cost) -includes cost of all resources used to produce good, including value of a seller's time

Allocation of Resources

How much of each good is produced, which producers produce it, and which consumers consume it

Market's Allocation of Resources

In a market economy, the allocation of resources is decentralized, determined by the interactions of many self-interested buyers and sellers

Total Surplus

TS = CS + PS -total gains from trade in a market -value to buyers - cost to sellers

Consumer Surplus

The amount a buyer is willing to pay minus the amount the buyer actually pays CS = WTP - P -Measures the benefit buyers receive from participating in the market

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it -measures the benefit seller's receive from participating in the market PS = P - cost -PS is the area between P and the S curve, from 0 to Q

Which buyer's consume the good?

The buyer's who value the good most highly are the ones who consume it

The Free Market vs. Govt Intervention

The market eq'm is efficient. No other outcome achieves higher total surplus -gov't cannot raise total surplus by changing the market's allocation of resources -there can be a reallocation of resources to benefit consumers (or producers) at the expense of producers (or consumers) and the total surplus

Does market equilibrium Q maximize total surplus?

The market eq'm quantity maximizes total surplus: at any other quantity, can increase total surplus by moving toward the market eq'm quantity

Willingness to Pay (WTP)

The maximum amount a buyer will pay for a good -It measures how much the buyer values the good

Producer Surplus and the Supply curve

Total PS equals the area above the supply curve under the price, from 0 to Q

Total Consumer Surplus

Total consumer surplus equals the area under the demand curve, above the price, from 0 to Q

Consumer Surplus and Elasticity

When demand is inelastic, there is greater potential consumer surplus because there are some buyers willing to pay a high price to continue consuming the product