ch 7 micro
markets
are usually a good way to organize economic activity
an allocation of resources is __ if ti maximizes total surplus
efficient
market equilibrium is
efficient
adam smith
invisible hand
welfare economics
studies how the allocation of resources affects economic well being
producer surplus
the amount a seller is paid for a good minus the sellers costs
Which of the following will cause a decrease in consumer surplus?
the imposition of a binding price floor in the market
Which of the following will cause no change in producer surplus?
the imposition of a nonbinding price ceiling in the market
laissez faire
the notion that government should not interfere wight he market
producer surplus
(amount received by sellers) - (cost to sellers) = sellers gains from participating in the market
consumer surplus
(value to buyers) - (amount paid by buyers) = buyers gains from participating in the market
market failures occur when
- a buyer or seller has market power - the ability to affect market price - transactions have side effects, called externalities that affect bystanders ( ex: pollution)
allocation of resources
- how much of each good is produced - which producers produce it - which consumers consume it
efficiency means
- the goods are consumed by the buyers who value them most highly - the goods are produced by the producers with the lowest costs - rising or lowering the quantity of a good would not increase total surplus
Abraham drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.55 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Abraham is rational in deciding how many cans to buy. His consumer surplus is
0.70
Brock is willing to pay $400 for a new suit, but he is able to buy the suit for $350. His consumer surplus is
50
Consumer surplus is equal to the
Value to buyers - Amount paid by buyers.
total surplus
consumer surplus + producer surplus = total gains from trade = (values to buyers) - (cost to sellers)
Willingness to pay measures
how much the buyer values the good
If a market is allowed to adjust freely to its equilibrium price and quantity, then an increase in demand will
increase producer surplus.
consumer surplus
is the amount a buyer is willing to pay minus the amount the buyer actually pays
willingness to pay
is the maximum amount the buyer will pay for that good
cost
is the value of everything a seller must give up to produce good
Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market
may increase, decrease, or remain unchanged.
Moving production from a high-cost producer to a low-cost producer will
raise total surplus.
the producer surplus equals
the area above the supply curve under the price
Total consumer surplus equals
the area under the demand curve above the price
marginal buyer
the buyer who would leave the market if P were any higher
marginal seller
the seller who would leave the market if the price were any lower
Total surplus is equal to
value to buyers - cost to sellers.
