Chapter 7 Econ

Suppose that price of a new bicycle is $300. She values a new bicycle at $400. It costs $200 for the seller to produce the new bicycle. What is the value of total surplus if Sue buys a new bike?

$200

What two ways does consumer surplus increase on a graph?

A decrease in price and increase in willingness to pay

What does an economist mean by "efficiency"?

A resource allocation that maximizes total surplus by everyone in society

What is consumer surplus and how is it measured?

Amount a buyer is willing to pay for a good minus the amount the buyer actually pays//it's the area below the demand curve and above the price

What is producer surplus and how is it measured?

Amount a seller is paid minus sellers cost of providing// it is the area below price and above the supply curve

Which two days does producer surplus increase on a graph?

An increase in the market price and a decrease in cost of production

Consumer surplus is a good measure of what?

Buyers benefits if buyers are rational

Externalties are side effects, such as pollution, that are not taken into account by who?

Buyers or sellers in a market

An increase in the price of a good alone a stationary demand curve decreases what?

Consumer surplus

What is total surplus equal to? Where is it found on a graph?

Consumer surplus plus producer surplus// it is between the supply and demand curve

Willingness to sell is the same as?

Cost

What are the two types of market failure?

External ties and market power

Consumers who value product most highly get the product when?

First

Can a benevolent social planner choose a quantity that provides greater economic welfare than the equilibrium quantity generated in a competitive market? Why?

Generally, no. At any quantity below the equilibrium quantity, the market fails to produce units where the value to the marginal buyer exceeds the cost. At any quantity above the equilibrium quantity, the market produces units where the cost to the marginal producer exceeds the value to the buyers

If market power is perfectly competitive, it means that no buyers or sellers will what?

Have an effect on the price

An increase in consumer surplus means that,

Initial consumers gain more and new consumers will enter the market

Anytime the benevolent social planner wants to help one group, what happens to the other group?

It gets affected

Market power can cause markets to be inefficient because what?

It keeps price and quantity from equilibrium of supply and demand

What does consumer surplus reflect in most markets? Is this always a good reflection? Explain.

It measures the benefit of economic well-being if consumers participation in a market. It is not always a good reflection unless they are making rational decisions

What's the only thing that'll cause an increase in consumer surplus?

Lower price and higher value (Willingess to pay)

Many different prices yield what?

Many different buyers

The height of the supply curve is the what?

Marginal sellers cost

Externalties are created when what?

Market outcomes affect individuals other than the buyers and sellers

Willingness to pay is the same as what?

Maximum value

The sellers cost of production is the what?

Minimum amount seller is willing to accept for that good

How does a competitive market choose which producers will produce and sell a product?

Only producers who have costs at or below market price will be able to produce and sell that good

When the price of a good rises, what happened to producer surplus? Why?

PS increasing because sellers who were already there receive greater surplus on units they were initially selling and new sellers enter because the price is above their cost

Postive externalities can include:

Passi laws, taxes, putting people in jail, fines

If the government gets involved, there will what kind of externalties?

Positive

Producer surplus is the area above the supply curve and below the?

Price

If the demand curve in a market is stationary, consumer surplus decreases when?

Price in that market increases

An increase in the price of a good along a stationary supply curve increases what?

Producer surplus

Equity is what?

Subjective

What are the two characteristics for something to have value?

The good or service must be somewhat scarce and have utility (utility means the capacity to be useful)

What is the relationship between the buyers willingness to pay (WTP) for a good and the demand curve for that good?

The height of the demand curve at any quantity is the marginal buyers willingness to pay

What is the relationship between sellers cost to produce a good and the supply curve for that good?

The height of the supply curve at any quantity is the marginal seller's cost.

The major advantage of allowing free markets to allocate resources is that what?

The outcome of the allocation is efficient

Cost to the seller includes the opportunity cost of what?

The sellers time

Even tho in a supply curve a producer's surplus could be 0, they are still being compensated for their?

Time

Adam Smith's "invisible hand" concept suggests that a competitive market outcome maximizes what?

Total surplus

Competitive markets maximize what?

Total surplus

Equilibrium in a competitive market maximizes what?

Total surplus

Free markets and equilibrium maximize what?

Total surplus

Explain the "cost of production"

Value of everything a seller must give up to produce a good (these include out of pocket expense and the value sellers place on their time)

Consumer surplus can increase due to some things such as:

Your income increase or your tastes changes so therefore your value will change (WILLINGNESS TO PAY)

What is the value of consumer surplus for the marginal buyer? Why?

Zero, because the marginal buyer is the buyer who would leave the market if the price were any higher. Therefore, they are paying their willingness to pay and are receiving no surplus.

In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in a market, the planner should

allow the market to seek equilibrium on its own

If a market generates a side effect or externality, then free market solutions

are inefficient

If a producer has market power (can influence the price of the product in the market) then free market solutions

are inefficient

If buyers are rational and there is no market failure,

free market solutions are efficient and free market solutions maximize total surplus

Consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer surplus

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

What is a marginal buyer?

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

If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then

the cost of production on the last unit produced exceeds the value placed on it by buyers.

Equity

the fairness of the distribution of well-being among the members of society

Market failure

the inability of some unregulated markets to allocate resources efficiently

If a market is efficient, then

the market allocates output to the buyers who value it the most; market allocates buyers to the sellers who can produce the good at the least cost; the quantity produced in the market maximizes the sum of consumer and producer surplus

Willingness to pay

the maximum amount that a buyer will pay for a good

Efficiency

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

What is a marginal seller?

the seller who would leave the market if the price were any lower

Welfare economics

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

Cost

the value of everything a seller must give up to produce a good (the value they place on their time is included in this cost)

If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then

the value placed on the last unit of production by buyers exceeds the cost of production