Econ 200 Chapter 7 - Consumers, Producers, and the Efficiency of Markets

Market Outcomes

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

Market Power

A single buyer or seller (or a small group of them) may be able to control market prices Market power can cause markets to be inefficient bc it keeps the price and quantity away from the levels determined by equilibrium of supply and demand

Equality

The property of distributing economic prosperity uniformly among the members of society

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it Measures the benefits buyers receive from participating in a market Related to demand curve for a product The increase in consumer surplus of existing buyers is the reduction in the amount they pay **The area below the demand curve and above the price measures the consumer surplus in a market

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it Measures the benefit sellers receive from participating in a market Related to supply curve The height of supply curve measures sellers' costs and the difference between the price and cost of production is each seller's producer surplus. Thus, total area is sum of producer surplus of all sellers **The area below the price and above the supply curve measures the producer surplus in a market

Market Failure

The inability of some unregulated markets to allocate resources efficiently Market power and externalities are examples of market failure

Willingness to Pay

The maximum amount that a buyer will pay for a good Measures how much that buyer values the good

Efficiency

The property of a resource allocation of maximizing the total surplus received by all members of society If allocation is inefficient, some of the potential gains from trade among buyers and sellers are not being realized - EX: An allocation is inefficient if a good is not being produced by sellers with lowest cost --> moving production from a high-cost producer to a low-cost producer will lower total cost sellers and raise total surplus

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 Measure of seller's willingness to sell his/her services

Total Surplus

To measure the economic well-being of a society, a possible measure is the sum of consumer and producer surplus Total surplus = value to buyers - cost to sellers

Externalities

When a market exhibits side effects (externalities), the welfare implications of market activity depend on more than just the value obtained by buyers and the cost incurred by sellers b/c buyers and sellers may ignore these side effects when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole