Read and Comprehend Chapter 5
Suppose a supply curve has a vertical intercept of (0,0); the equilibrium price is $30 and the equilibrium quantity is 40. How would the producer surplus be calculated?
1/2 base x height: 1/2(40x30)= $600
Willingness to sell is the minimum price that a seller is willing to accept in exchange for?
A good or service
What is the demand curve?
A line showing the maximum willingness to pay for all buyers
What is deadweight loss?
A loss of total surplus because the quantity traded differs from the market equilibrium quantity
What is surplus?
A way of measuring who benefits from transactions, and by how much
What can we do to describe the overall benefits that buyers received in a market?
Add up each individual's difference between what they are willing to pay and the market price
What can we do to describe the overall benefits that sellers received in a market?
Add up each seller's difference between what they are willing to accept and the market price
What does consumer surplus tell us?
When the price decreases, consumers are better off
Along the supply curve, at every price, each potential seller has?
Willingness
What is the net value of a transaction in a zero-sum game?
Zero
In a zero-sum game, whenever one person gains, ___
another loses an equal amount
Some amount of producer surplus is transferred to consumers if price is what?
artificially low
Graphically how is surplus represented?
at the triangle shaped area between a supply or demand curve and the market quantity
When the price is ____ the equilibrium price, buyers gain some well-being at the expense of sellers, but they also lose some well-being because there are fewer transactions taking place
below
Consumer surplus tells us that when price decreases, consumers are what?
better off
In a market with voluntary transactions, who is the winner?
both the buyer and seller
How is total producer surplus represented graphically?
by the area above the supply curve and below the equilibrium price
How is total consumer surplus represented graphically?
by the area underneath the demand curve and above the equilibrium price
Why are the equilibrium price and quantity in a competitive market important?
Because at this output level, the total well-being of those involved is maximized
When a perfectly competitive, well-functioning market maximizes total surplus, the market is said to be __?
efficient
At prices above or below the market equilibrium price, what happens?
fewer trades take place, become some people are no longer willing to buy or sell
At prices above the maximum willingness to pay, the opportunity cost is ___ than benefits
greater
The relationship showing producers' willingness to sell is the what?
Supply curve
Suppose you get something for less than you would have been willing to pay, or sell it for more than the minimum you would have accepted. Economists use the word _____ to describe this concept
surplus
Suppose a demand curve has a vertical intercept of (0,100). Suppose a supply curve has a vertical intercept of (0,0). The equilibrium price is $50 and the equilibrium quantity is 60. How would the total surplus be calculated?
the area is 1/2 base x height: 1/2((100-0)x60)
Using the concept of surplus is the best way to look at _
the benefits people receive from successful transactions
What is sellers' willingness to sell determined by?
the opportunity cost of the sale
What happens to consumer surplus when price is artificially increased?
transferred to producers
True or false: when a perfectly competitive well-functioning market is in equilibrium, total surplus is maximized
true
What can calculations of surplus clearly show?
who benefits and who loses from policies such as taxes and minimum wages
Along the supply curve, at every price, each potential seller has a what?
willingness to sell
In a market with voluntary transactions, total surplus cannot be less than what?
zero
Equilibrium in a perfectly competitive, well-functioning market maximizes what?
total surplus
The use or enjoyment that the seller could get from keeping the product or from doing something else with the money that would be required to make it is the _?
Opportunity cost of the seller
When the price is artificially high and some transactions no longer take place, what happens?
Part of the consumer surplus is transferred to producers; part of the consumer and producer surplus is lost to both consumers and producers
What do economists call the maximum price that a buyer is willing to pay?
Reservation price
On a graph, consumer surplus is?
The area below the demand curve and above the price up to the point of consumption
How can we calculate deadweight loss?
The area of the deadweight loss triangle on a graph and surplus (market equilibrium before intervention) MINUS the surplus (market equilibrium after intervention)
The difference between willingness to pay and the actual price is?
The net benefit that a consumer receives from purchasing a good or service
What is consumer surplus?
The net benefit that a consumer receives from purchasing a good or service
What is producers surplus?
The net benefit that a producer receives from the sale of a good or service
What does willingness to pay for a product represent?
The price at which the benefit received is equal to the benefit of spending money on another alternative
The difference between the producer's willingness to sell and the actual price is?
The producer surplus
Graphically, assuming an upward sloping supply curve, economic surplus is represented as?
The triangular area between a supply or demand curve and the market price
The opportunity cost of selling a product is?
The use or enjoyment that the seller could get from keeping the product or from doing something else with the money that would be required to make it
We can add up each individual's consumer surplus to _?
Describe the overall benefits that buyers received in a market
In a market where manufactures produce and sell new products, the minimum price will _?
Have to be high enough to cover the cost of production
What does measuring producer surplus tell us?
How much better or worse sellers are when the price changes
What is true about total surplus?
it exists as a result of participation in market exchanges, it is the sum of consumer and producer surplus
Markets can be missing for a variety of reasons, including:
lack of technology that would make the exchanges possible, public policy prevents the market from existing, and lack of accurate information or communication between potential buyers and sellers
In a missing market, when quantity is at or close to zero, total surplus is?
lower than it could be if a well-functioning market existed
Deadweight loss is a loss of total surplus that occurs because the quantity traded is different from the what?
market equilibrium quantity
In market equilibrium, total surplus is ___?
maximized
Equilibrium in a perfectly competitive, well-functioning market does what?
maximizes total surplus and is, therefore, efficient
Dead-weight loss is the total surplus at the market equilibrium before the intervention ____ the total surplus after a market intervention
minus
When there are people who would like to make exchanges but cannot, for one reason or another, we say that a market is ___?
missing
The difference between the producer's willingness to sell and the actual price is the what?
net benefit that a producer receives from the sale of a good or service
The market is efficient at equilibrium because there is what?
no exchange that can make anyone better off without someone becoming worse off
Willingness to pay is the point at which the benefit that a person will get from the camera is equal to the what?
opportunity cost
At prices below the maximum willingness to pay, the benefits ___ the opportunity cost
outweigh
To describe the overall benefits that sellers received in a market, we can add up each seller's what?
producer surplus
What is true if the price is artificially low and some transactions no longer take place?
producer surplus falls, consumer surplus may rise or fall
The concept of surplus measures the benefit that people receive when they:
sell something for more than they would have been willing to accept, and when they buy something for less than they would have been willing to pay
