chapter 7 consumers, producers, and the efficiency of markets
Policymakers are often concerned with the ___ and ___ of economic outcomes
efficiency and equality
an allocation of resources that maximizes total surplus is said to be ___
efficient
Markets do not allocate resources efficiently in the presence of ___
market failures
examples of market failures
market power or externalities
producer surplus measures the benefit ____ get from participating in a market
sellers
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
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
equality
the property of distributing economic prosperity uniformly among the members of society
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 equilibrium of supply and demand maximizes _____
total surplus
If the cost for Moe to mow a lawn is $5, for Larry to mow a lawn is $7, and for Curly to mow a lawn is $9, what is the value of their producer surplus if each mows a lawn and the price for lawn mowing is $10?
(10-5)+(10-7)+(10+9)=9
What is consumer surplus, and how is it measured?
Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays. It is measured as the area below the demand curve and above the price.
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.
What does an economist mean by "efficiency"?
It is a resource allocation that maximizes the total surplus received by all members of society.
How does a competitive market choose which producers will produce and sell a product?
Only those producers who have costs at or below the market price will be able to produce and sell that good.
When the price of a good rises, what happens to producer surplus? Why?
Producer surplus increases because existing sellers receive a greater surplus on the units they were already going to sell and new sellers enter the market because the price is now above their cost.
What is producer surplus, and how is it measured?
Producer surplus is the amount a seller is paid for a good minus the seller's cost of providing it. It is measured as the area below the price and above the supply curve.
What is the relationship between the buyers' willingness to pay for a good and the demand curve for that good?
The height of the demand curve at any quantity is the marginal buyer's willingness to pay. Therefore, a plot of buyers' willingness to pay for each quantity is a plot of the demand curve.
What is the relationship between the 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. Therefore, a plot of the sellers' cost for each quantity is a plot of the supply curve.
Is a competitive market efficient? Why or why not?
Yes, because it maximizes the area below the demand curve and above the supply curve, or total surplus.
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.
The demand curve for cookies is downward-sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises to $3, what happens to consumer surplus? a. It falls by less than $100. b. It falls by more than $100. c. It rises by less than $100. d. It rises by more than $100.
a. It falls by less than $100.
Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much at $300 for the massage, but they negotiate a price of $200. In this transaction, a. consumer surplus is $20 larger than producer surplus. b. consumer surplus is $40 larger than producer surplus. c. producer surplus is $20 larger than consumer surplus. d. producer surplus is $40 larger than consumer surplus.
a. consumer surplus is $20 larger than producer surplus.
producer surplus is the area...
above the supply curve and below the price
John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase? a. by less than $100 b. between $100 and $200 c. between $200 and $300 d. by more than $300
b. between $100 and $200
When a market is in equilibrium, the buyers are those with the ________ willingness to pay and the sellers are those with the ________ costs. a. highest, highest b. highest, lowest c. lowest, highest d. lowest, lowest
b. highest, lowest
consumer surplus is the area....
below the demand curve and above the price
consumer surplus measures the benefit ____ get from participating in a market
buyers
An efficient allocation of resources maximizes a. consumer surplus. b. producer surplus c. consumer surplus plus producer surplus. d. consumer surplus minus producer surplus.
c. consumer surplus plus producer surplus.
Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay is a. negative. b. zero. c. positive but less than the marginal seller's cost. d. positive and greater than the marginal seller's cost.
c. positive but less than the marginal seller's cost.
total surplus
consumer surplus + producer surplus
willingness to pay
the maximum amount that a buyer will pay for a good
