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

efficiency

the property of a resource allocation of maximizing the total surplus received by all members of society

why does a decrease in price increase consumer surplus?

the original buyers in the market get more consumer surplus new members also get consumer surplus

what area on the demand curve measures consumer surplus?

below the demand curve, above the price

welfare economics

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

what is total surplus?

the sum of consumer and producer surplus

what area on a supply and demand graph represents total surplus?

the total area between supply and demand curves up to the point of equilibrium

what does equilibrium in a market maximize?

the total benefits received by buyers or sellers

cost

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

what does the height on the demand curve (with the stairs) show?

the willingness to pay of the marginal buyer

why does a higher price raise producer surplus?

-the original sellers get more for what they sell -new sellers come in because they are willing to produce the good at the higher price

what are the three insights of market outcomes?

1. free markets allocate the supply of goods to buyers who value them most highly, as measured by willingness to pay 2. free markets allocate the demand for goods to the sellers who can produce them at least cost 3. free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus

what are the two ways producer surplus can be increased?

1. increase in price 2. decrease in cost

what are the two ways to increase consumer surplus?

1. price decrease 2. greater value placed on the good or service

can producers have different costs with the same exact supplies? why or why not?

they can have different costs because they all value their time differently

consumer surplus

a buyer's willingness to pay minus the amount the buyer actually pays

what is the area of the producer surplus?

area below the price and above the supply curve

from what standpoint is consumer surplus measured?

from the eyes of the buyers

what does willingness to pay measure?

how much a buyer values a good

what does a lower market price do to the demand?

it attracts more buyers, so it increases

what is the conclusion of market equilibrium (regarding outcome)?

it is an efficient allocation of resources

according to welfare economics, why is the equilibrium price the best price?

it maximizes the total welfare of consumers and producers

what is producer surplus?

it measures the benefit to sellers of participating in a market

producer surplus (actual measurement)

the amount a seller is paid for a good minus the seller's cost of providing it

what is consumer surplus?

the benefits buyers receive from participating in a market

what does welfare economics examine?

the benefits that buyers and sellers receive from taking part in a market

what is a marginal buyer?

the buyer who would leave the market first if the price were any higher

what does the height of the supply curve show?

the cost of the marginal seller

equity

the fairness of the distribution of well-being

why doesn't the social planner need to alter the market outcome?

the invisible hand has already endorsed an efficient outcome

willingness to pay

the maximum amount that a buyer will pay for a good

what does market equilibrium maximize?

total surplus and economic well being

what is another way to calculate total surplus?

value to buyers-cost to sellers

what is the consumer surplus at a buyer's willingness to pay?

zero dollars and zero cents, girly pop