Microeconomics - Chapter 7 Other definitions
Free markets allocate the demand for goods to
the sellers who can produce them at least cost
free market
is considered to be the best way to maximize the sum of consumer and producer surplus in the economy
Total surplus
is the sum of consumer and producer surplus
Total surplus
is the sum of consumer and producer surplus which is the area between the supply and the demand curves up to the equilibrium quantity
The equilibrium price leads to three favourable outcomes:
1. Free markets allocate the supply of products to the buyers who value them the most, as measured by more willingness to pay. Thus, if consumers with the most willingness to pay for the product actually obtain it, then the consumer surplus (which equals willingness to pay minus amount paid) is maximized. 2. Free markets allocate the demand for products to the sellers who can produce them at the lowest production cost. Thus, producer surplus (which equals amount received minus production cost) is maximized. 3. The equilibrium quantity marked in the figure maximizes total surplus—the sum of consumer plus producer surplus.
A reduction in the product's price raises consumer surplus due to two reasons.
1.existing buyers now pay a lower price 2.a lower price induces new buyers to enter the market
producer surplus =
amount received by sellers - cost to sellers
market equilibrium maximizes the sum of producer and consumer surplus
because at quantities less than the equilibrium quantity, the value to the buyers exceeds the cost to the sellers. At the same time, at quantities greater than the equilibrium quantity, the cost to the sellers exceeds the value to the buyers. Therefore, the market equilibrium maximizes the sum of producer and consumer surplus.
Consumer surplus may not be a good measure of economic well-being in some markets
because it is based on the assumption that consumers are rational when they make decisions and that their preferences should be respected. This may not be true of consumers of cigarettes and other addictive products.
what tools economics use to study the welfare of buyers and sellers in a market
consumer surplus and producer surplus
We classify society into two general groups:
consumers and producers
The economic well-being of society would be maximized by
generating the most surplus for its two groups—consumers and producers
consumer surplus
measures the area below the demand curve and above the price
producer surplus
measures the area below the price and above the supply curve
consumer surplus
measures the benefit that buyers receive from a good as the buyer themselves perceive it
producer surplus
measures the benefit to sellers of participating in a market
The height of the supply curve reflects
sellers' costs
welfare economics
study of how the allocation of resources affects the economic well-being of society
Free markets allocate the supply of goods to
the buyers who value them most highly
producer surplus
the difference between the price and cost of production
consumer surplus
the difference between willingness to pay and the market price
Markets will NOT allocate resources efficiently if
there are externalities
For an efficient allocation of society's scarce resources
total surplus should be maximized
consumer surplus =
value to buyers - amount paid by buyers
total surplus =
value to buyers - amount paid by buyers + amount received by sellers - cost to sellers
total suplus =
value to buyers - cost to sellers
Interference with free market equilibrium—for example, in the form of taxes or trade restrictions
would decrease the welfare of members of society