Microeconomics Chapter 7

Total Surplus =

(CS) + (PS) = (WTP - P) + (P - Cost) & 1/2(BH)

Why does PS^ when P^?

1. More producers in mkt 2. Existing sellers get more PS as P^

What exchange would give max Surplus?

1. highest buyers 2. lowest sellers

Maximizing TS would mean:

1. up or down, qty would not ^ TS 2. Goods R produced by producers w/ lowest cost 3. Goods R consumed by buyers who value them most highly

Why did CS^ when P went down

1.more consumers are brought into the market 2.existing Consumers get more CS and P goes down

Why is it bad to go beyond Qe?

Because the cost become negative. It would cost more to put the goods out there than we would value them.

______ capture all the benefits of falling production costs, with consumer surplus rising from area A to area A+B.

Consumers

An increase in price would do what to consumer surplus?

Decrease it because it would decrease quantity demanded.

A higher price does what to producer surplus?

Raises it

Marginal Seller

Seller who would leave if P were any lower.

An efficient allocation of resources maximizes

consumer surplus + producer surplus

If the supply of flat-screen TVs is very elastic, then the shift of the supply curve benefits ________ most.

consumers

Height of Supply Curve at any Quantity is ____ of the ______ ______?

cost; marginal seller

When a market is in equilibrium, the buyers are those with the ________ willingness to pay, and the sellers are those with the ________ costs.

highest ; lowest

Equilibrium outcome is

how we maximize TS

Consumer Surplus

is the difference between a buyer's willingness to pay (what the item is worth to the buyer) and the price the buyer actually pays.

Producer Surplus

is the difference between the price a seller actually receives for an item and the lowest price at which the seller would be willing to provide the item (the additional cost to the seller of providing another unit of the item).

Total Surplus

is the surplus that all the members of an economy—in this case, consumers and producers—earn.

An allocation of resources is efficient if?

it maximizes Total Surplus

An allocation is inefficient if a good is not being produced by the sellers with _____ ______. In this case, moving production from a high-cost producer to a low-cost producer will _____ the total cost to sellers and _____ total surplus.

lowest cost lower ; raise

Willingness to pay (WTP)

max amount the buyer will pay for that good.

An allocation is inefficient if a good is not being consumed by the buyers who value it ______ ______. In this case, moving consumption of the good from a buyer with a low valuation to a buyer with a high valuation will _____ total surplus.

most highly raise

In a market where the Qty produced is greater than the market equilibrium quantity, resulting in the value to the marginal buyer being less than the cost to the marginal seller, how would u raise total surplus?

reduce quantity

If demand rises, producer surplus __

rises

Sellers will only produce and sell if....

the P>Cost

Marginal Buyer

the buyer who would leave the mkt if the price were any higher.

Welfare economics

the study of how the allocation of resources affects economic well-being.

In a free market, the equilibrium quantity (Qe ) maximizes?

the sum of consumer surplus and producer surplus since Qe is the level of output where the value to buyers is just equal to the cost to sellers.

For units of output below Qe

the value to buyers is greater than the cost to sellers.

while for units of output above Qe

the value to buyers is less than the cost to sellers.

Coast

value of anything seller must give up to produce a good. (opportunity cost)