econ chapter 7
maximum amount they are willing to pay for a good
a buyer's willingness to pay is that buyer's
consumer surplus
a buyer's willingness to pay minus the amount the buyer actually pays
maximizes total surplus
adam smith's "invisible hand" concept suggests that a competitive market outcome
decreases consumer surplus
an increase in the price of a good along a stationary demand curve
increases producer surplus
an increase in the price of a good along a stationary supply curve
no; at any quantity below the eq, the market fails to produce units where the value to the marginal buyer exceeds the cost. at any quantity above the eq, the market produces units where the cost to the marginal proper exceeds the value to buyers
can a benevolent social planner choose a quantity that provides greater economic welfare than the eq generated in a competitive market? why?
below the demand curve and above the price
consumer surplus is the area
only producers who have costs at or below the market price will be able to produce and sell that good
how does a competitive market choose which producers will produce and sell a product?
the value placed on the last unit of production by buyers exceeds the cost of production
if a benevolent social planner chooses to produce less 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
if a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then
$2,000
if a buyer's willingness to pay for a new Honda is $20,000 and she is able to actually buy it for $18,000, her consumer surplus is
are inefficient
if a market generates a side effect or externality, then free market solutions
the market allocates output to the buyers that value it the most. the market allocates buyers to sellers who can produce the good at least cost. the quantity produced in the market maximizes the sum of consumer and producer surplus
if a market is efficient, then
are inefficient
if a producer has market power (can influence the price of the product in the market) then free market solutions
free market solutions are efficient & maximize total surplus
if buyers are rational and there is no market failure
(10-5) + (10-7) + (10-9) = $9
if the cost for moe to mow a lawn is $5, for larry to mow a lawn is $7, and for curly to mow a lawn is $9, what is the value of their producer surplus if each mow a lawn and the price for lawn mowing is $10?
allow the market to seek equilibrium on its own
in general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should
yes; it maximizes the are below the demand curve and above the supply curve, or total surplus
is a competitive market efficient? why?
efficiency joe should receive the glove
joe has ten baseball gloves and sue has none. a baseball glove costs $50 to produce. if joe values an additional baseball glove at $100 and sue values a baseball glove at $40, then to maximize
the benefit buyers place on medical care is equal to the cost of producing it
medical care clearly enhances people's lives. therefore, we should consume medical care until
above the supply curve and below the price
producer surplus is the area
$200
suppose that the price of a new bicycle is $300. sue 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?
two vases will be sold and consumer surplus is $5
suppose there are three identical vases available to be purchased. buyer 1 is willing to pay $30 for one, buyer 2 is willing to pay $25 for one, and buyer 3 is willing to pay $20 for one. if the price is $25, how many vases will be sold and what is the value of consumer surplus in this market?
t
t or f: consumer surplus is a good measure of buyers' benefits if buyers are rational
f; consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays
t or f: consumer surplus is the buyer's willingness to pay minus the seller's cost
t
t or f: cost to the seller includes the opportunity cost of the seller's time
t
t or f: equilibrium in a competitive market maximizes total surplus
t
t or f: externalities are side effects, such as pollution, that are not taken into account by the buyers and sellers in a market
f; free markets allocate output to buyers who have a willingness to pay that is above the price
t or f: free markets are efficient because they allocate output to buyers who have a willingness to pay that is below the price
t
t or f: if the demand curve in a market is stationary, consumer surplus decreases when the price in that market increases
f; $3.00-$2.00= $1.00
t or f: if your willingness to pay for a hamburger is $3.00 and the price is $2.00, your consumer surplus is $5.00
f; it is a measure of the benefits of market participation to sellers in a market
t or f: producer surplus is a measure of the unsold inventories of suppliers in a market
t
t or f: producer surplus is the area above the supply curve and below the price
f; producing above the equilibrium quantity reduces total surplus because units are produced for which cost exceeds the value to buyers
t or f: producing more of a product always adds to total surplus
t
t or f: the height of the supply curve is the marginal seller's cost
t
t or f: the major advantage of allowing free markets to allocate resources is that the outcome of the allocation is efficient
t
t or f: the two main types of market failure are market power and externalities
f; total surplus is the value to buyers minus the cost to sellers
t or f: total surplus is the seller's cost minus the buyer's willingness to pay
producer surplus
the amount a seller is paid for a good minus the seller's cost of providing it
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
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
the minimum amount the seller is willing to accept for a good
the seller's cost of production is
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 (including the value they place on their time)
below the demand curve above the supply curve
total surplus is the area
it maximizes the total surplus received by all members of society
what does an economist mean by "efficiency"?
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays. measured as area below the demand curve and above the price
what is consumer surplus and how is it measured?
the amount a seller is paid for a good minus the seller's cost; measured as the area below the price and above the supply curve
what is producer surplus and how is it measured?
the height of the demand curve at any quantity is the marginal buyers willingness to pay. therefore, a plot of buyer's willingness to pay for each quantity is a plot of the demand curve
what is the relationship between the buyers' willingness to pay for a good and the demand curve for that good?
the height of the supply curve at any quantity is the marginal sellers cost. therefore, a plot of the seller's cost for each quantity is a plot of the supply curve
what is the relationship between the sellers' cost to produce a good and the supply curve for that good?
0 because the marginal buyer is the buyer that would leave the market if the price were higher (they are paying their willingness to pay and receiving no surplus)
what is the value of consumer surplus for the marginal buyer? why?
it increases because existing sellers receive a greater surplus on the units they were already going to sell and new sellers enter the market because the price is above their cost
when the price of a good rises, what happens to producer surplus? why?