ch 7 micro

markets

are usually a good way to organize economic activity

an allocation of resources is __ if ti maximizes total surplus

efficient

market equilibrium is

efficient

adam smith

invisible hand

welfare economics

studies how the allocation of resources affects economic well being

producer surplus

the amount a seller is paid for a good minus the sellers costs

Which of the following will cause a decrease in consumer surplus?

the imposition of a binding price floor in the market

Which of the following will cause no change in producer surplus?

the imposition of a nonbinding price ceiling in the market

laissez faire

the notion that government should not interfere wight he market

producer surplus

(amount received by sellers) - (cost to sellers) = sellers gains from participating in the market

consumer surplus

(value to buyers) - (amount paid by buyers) = buyers gains from participating in the market

market failures occur when

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

allocation of resources

- how much of each good is produced - which producers produce it - which consumers consume it

efficiency means

- the goods are consumed by the buyers who value them most highly - the goods are produced by the producers with the lowest costs - rising or lowering the quantity of a good would not increase total surplus

Abraham drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.55 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Abraham is rational in deciding how many cans to buy. His consumer surplus is

0.70

Brock is willing to pay $400 for a new suit, but he is able to buy the suit for $350. His consumer surplus is

50

Consumer surplus is equal to the

Value to buyers - Amount paid by buyers.

total surplus

consumer surplus + producer surplus = total gains from trade = (values to buyers) - (cost to sellers)

Willingness to pay measures

how much the buyer values the good

If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will

increase producer surplus.

consumer surplus

is the amount a buyer is willing to pay minus the amount the buyer actually pays

willingness to pay

is the maximum amount the buyer will pay for that good

cost

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

Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market

may increase, decrease, or remain unchanged.

Moving production from a high-cost producer to a low-cost producer will

raise total surplus.

the producer surplus equals

the area above the supply curve under the price

Total consumer surplus equals

the area under the demand curve above the price

marginal buyer

the buyer who would leave the market if P were any higher

marginal seller

the seller who would leave the market if the price were any lower

Total surplus is equal to

value to buyers - cost to sellers.