AP Econ - Chapter 7: Consumers, Producers, and the Efficiency of Markets
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
why does a decrease in price increase consumer surplus?
the original buyers in the market get more consumer surplus new members also get consumer surplus
what area on the demand curve measures consumer surplus?
below the demand curve, above the price
welfare economics
the study of how the allocation of resources affects economic well-being
what is total surplus?
the sum of consumer and producer surplus
what area on a supply and demand graph represents total surplus?
the total area between supply and demand curves up to the point of equilibrium
what does equilibrium in a market maximize?
the total benefits received by buyers or sellers
cost
the value of everything a seller must give up to produce a good
what does the height on the demand curve (with the stairs) show?
the willingness to pay of the marginal buyer
why does a higher price raise producer surplus?
-the original sellers get more for what they sell -new sellers come in because they are willing to produce the good at the higher price
what are the three insights of market outcomes?
1. free markets allocate the supply of goods to buyers who value them most highly, as measured by willingness to pay 2. free markets allocate the demand for goods to the sellers who can produce them at least cost 3. free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus
what are the two ways producer surplus can be increased?
1. increase in price 2. decrease in cost
what are the two ways to increase consumer surplus?
1. price decrease 2. greater value placed on the good or service
can producers have different costs with the same exact supplies? why or why not?
they can have different costs because they all value their time differently
consumer surplus
a buyer's willingness to pay minus the amount the buyer actually pays
what is the area of the producer surplus?
area below the price and above the supply curve
from what standpoint is consumer surplus measured?
from the eyes of the buyers
what does willingness to pay measure?
how much a buyer values a good
what does a lower market price do to the demand?
it attracts more buyers, so it increases
what is the conclusion of market equilibrium (regarding outcome)?
it is an efficient allocation of resources
according to welfare economics, why is the equilibrium price the best price?
it maximizes the total welfare of consumers and producers
what is producer surplus?
it measures the benefit to sellers of participating in a market
producer surplus (actual measurement)
the amount a seller is paid for a good minus the seller's cost of providing it
what is consumer surplus?
the benefits buyers receive from participating in a market
what does welfare economics examine?
the benefits that buyers and sellers receive from taking part in a market
what is a marginal buyer?
the buyer who would leave the market first if the price were any higher
what does the height of the supply curve show?
the cost of the marginal seller
equity
the fairness of the distribution of well-being
why doesn't the social planner need to alter the market outcome?
the invisible hand has already endorsed an efficient outcome
willingness to pay
the maximum amount that a buyer will pay for a good
what does market equilibrium maximize?
total surplus and economic well being
what is another way to calculate total surplus?
value to buyers-cost to sellers
what is the consumer surplus at a buyer's willingness to pay?
zero dollars and zero cents, girly pop
