Chapter 5 - Efficiency (Key Terms and Descriptions)

Deadweight Loss

A loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity

Describe the distribution of benefits that results from a policy decision

Prices above or below the market equilibrium reduce total surplus but also redistribute between producers and consumers differently. A price above the equilibrium always decreases consumer surplus; some producers win and others lose, and the overall effect on producer surplus depends on the shape of the supply and demand curves. A price below the equilibrium always decreases producer surplus; some consumers win and others lose.

Calculate producer surplus based on a graph or table

Producer surplus is a measure of the net benefits that a producer receives from the sale of a good or service, measured by the difference between the producer's willingness to sell and the actual price. Graphically, it is equal to the area above the supply curve and below the market price

Willingness to Buy

The maximum price that the buyer would be willing to pay for a good or service

Willingness to Sell

The minimum price that a seller is willing to accept in exchange for a good or service

Consumer Surplus

The net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price

Producer Surplus

The net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer's willingness to sell and the actual price

Calculate total surplus based on a graph or table

Total surplus is a measure of the combined benefits that everyone receives from participating in an exchange of goods or services. It is calculated by adding consumer surplus and producer surplus. Graphically, it is equal to the total area between the supply and demand curves, to the left of the equilibrium quantity

Explain why correcting a missing market can make everyone better off

A market is "missing" when there is a situation in which people would like to engage in mutually beneficial trades of goods and services but can't because no market for them exists. We can think of a missing market as a special case of a market where quantity is held below the equilibrium - in this case, at zero. Missing markets can occur for many reason, including government intervention or lack of information or technology. When missing markets are filled, people are able to trade, which generates surplus.

Define efficiency in terms of surplus, and identify efficient and inefficient situations

A market is efficient is there is no exchange that can make anyone better off without someone becoming worse off. An efficient market maximizes total surplus, but doesn't tell us how the surplus is distributed between producers and consumers. In a competitive market, efficiency is achieved only at the market equilibrium price and quantity; higher prices and lower prices will both decrease the quantity bought and sold and reduce total surplus.

Total Surplus

A measure of the combined benefits that everyone receives from participating in an exchange of goods or services

Zero-Sum Game

A situation in which whenever one person gains, another loses an equal amount, such that the net value of any transaction is zero.

Surplus

A way of measuring who benefits from transactions and by how much

Efficient Market

An arrangement such that no exchange can make anyone better off without someone becoming worse off

Define and calculate deadweight loss

Deadweight loss is the loss of total surplus that occurs when the quantity of a good or service that is bought or sold is below the market equilibrium quantity. Any intervention that moves a market away from the equilibrium price and quantity causes deadweight loss. Fewer exchanges take place, so there are fewer opportunities for the generation of surplus.

Calculate consumer surplus based on a graph or table

Surplus is a way of measuring who benefits from transactions and how much. Consumer surplus is the net benefit that consumers receive from purchasing a good or service, measured by the difference between each consumer;s willingness to pay and the actual price. Graphically, is it equal to the area below that demand curve and above the market price.

Use willingness to pay and willingness to sell to determine supply and demand at a given price

Willingness to pay and willingness to sell describe the value that an individual places on a particular good or service. Willingness to sell is the lowest price that a seller is willing to accept in exchange for a particular good or service. Consumers will buy only if the price is lower that their willingness to pay, and producers will sell only if the price is higher than their willingness to sell.