Chapter 7 Econ
Suppose that price of a new bicycle is $300. She values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike?
$200
What two ways does consumer surplus increase on a graph?
A decrease in price and increase in willingness to pay
What does an economist mean by "efficiency"?
A resource allocation that maximizes total surplus by everyone in society
What is consumer surplus and how is it measured?
Amount a buyer is willing to pay for a good minus the amount the buyer actually pays//it's the area below the demand curve and above the price
What is producer surplus and how is it measured?
Amount a seller is paid minus sellers cost of providing// it is the area below price and above the supply curve
Which two days does producer surplus increase on a graph?
An increase in the market price and a decrease in cost of production
Consumer surplus is a good measure of what?
Buyers benefits if buyers are rational
Externalties are side effects, such as pollution, that are not taken into account by who?
Buyers or sellers in a market
An increase in the price of a good alone a stationary demand curve decreases what?
Consumer surplus
What is total surplus equal to? Where is it found on a graph?
Consumer surplus plus producer surplus// it is between the supply and demand curve
Willingness to sell is the same as?
Cost
What are the two types of market failure?
External ties and market power
Consumers who value product most highly get the product when?
First
Can a benevolent social planner choose a quantity that provides greater economic welfare than the equilibrium quantity generated in a competitive market? Why?
Generally, no. At any quantity below the equilibrium quantity, the market fails to produce units where the value to the marginal buyer exceeds the cost. At any quantity above the equilibrium quantity, the market produces units where the cost to the marginal producer exceeds the value to the buyers
If market power is perfectly competitive, it means that no buyers or sellers will what?
Have an effect on the price
An increase in consumer surplus means that,
Initial consumers gain more and new consumers will enter the market
Anytime the benevolent social planner wants to help one group, what happens to the other group?
It gets affected
Market power can cause markets to be inefficient because what?
It keeps price and quantity from equilibrium of supply and demand
What does consumer surplus reflect in most markets? Is this always a good reflection? Explain.
It measures the benefit of economic well-being if consumers participation in a market. It is not always a good reflection unless they are making rational decisions
What's the only thing that'll cause an increase in consumer surplus?
Lower price and higher value (Willingess to pay)
Many different prices yield what?
Many different buyers
The height of the supply curve is the what?
Marginal sellers cost
Externalties are created when what?
Market outcomes affect individuals other than the buyers and sellers
Willingness to pay is the same as what?
Maximum value
The sellers cost of production is the what?
Minimum amount seller is willing to accept for that good
How does a competitive market choose which producers will produce and sell a product?
Only producers who have costs at or below market price will be able to produce and sell that good
When the price of a good rises, what happened to producer surplus? Why?
PS increasing because sellers who were already there receive greater surplus on units they were initially selling and new sellers enter because the price is above their cost
Postive externalities can include:
Passi laws, taxes, putting people in jail, fines
If the government gets involved, there will what kind of externalties?
Positive
Producer surplus is the area above the supply curve and below the?
Price
If the demand curve in a market is stationary, consumer surplus decreases when?
Price in that market increases
An increase in the price of a good along a stationary supply curve increases what?
Producer surplus
Equity is what?
Subjective
What are the two characteristics for something to have value?
The good or service must be somewhat scarce and have utility (utility means the capacity to be useful)
What is the relationship between the buyers willingness to pay (WTP) for a good and the demand curve for that good?
The height of the demand curve at any quantity is the marginal buyers willingness to pay
What is the relationship between sellers cost to produce a good and the supply curve for that good?
The height of the supply curve at any quantity is the marginal seller's cost.
The major advantage of allowing free markets to allocate resources is that what?
The outcome of the allocation is efficient
Cost to the seller includes the opportunity cost of what?
The sellers time
Even tho in a supply curve a producer's surplus could be 0, they are still being compensated for their?
Time
Adam Smith's "invisible hand" concept suggests that a competitive market outcome maximizes what?
Total surplus
Competitive markets maximize what?
Total surplus
Equilibrium in a competitive market maximizes what?
Total surplus
Free markets and equilibrium maximize what?
Total surplus
Explain the "cost of production"
Value of everything a seller must give up to produce a good (these include out of pocket expense and the value sellers place on their time)
Consumer surplus can increase due to some things such as:
Your income increase or your tastes changes so therefore your value will change (WILLINGNESS TO PAY)
What is the value of consumer surplus for the marginal buyer? Why?
Zero, because the marginal buyer is the buyer who would leave the market if the price were any higher. Therefore, they are paying their willingness to pay and are receiving no surplus.
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should
allow the market to seek equilibrium on its own
If a market generates a side effect or externality, then free market solutions
are inefficient
If a producer has market power (can influence the price of the product in the market) then free market solutions
are inefficient
If buyers are rational and there is no market failure,
free market solutions are efficient and free market solutions maximize total surplus
Consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
What is a marginal buyer?
the buyer who would leave the market first if the price were any higher
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then
the cost of production on the last unit produced exceeds the value placed on it by buyers.
Equity
the fairness of the distribution of well-being among the members of society
Market failure
the inability of some unregulated markets to allocate resources efficiently
If a market is efficient, then
the market allocates output to the buyers who value it the most; market allocates buyers to the sellers who can produce the good at the least cost; the quantity produced in the market maximizes the sum of consumer and producer surplus
Willingness to pay
the maximum amount that a buyer will pay for a good
Efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
What is a marginal seller?
the seller who would leave the market if the price were any lower
Welfare economics
the study of how the allocation of resources affects economic well-being
Cost
the value of everything a seller must give up to produce a good (the value they place on their time is included in this cost)
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then
the value placed on the last unit of production by buyers exceeds the cost of production
