Economics Chapter 7

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 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 unites 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

the relationship between the buyers' willingness to pay for a good and the demand curve of that good

The height of the demand curve and any given quantity is the marginal buyer's willingness to pay. Therefore, a plot of the 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 of that good

The height of the supply curve at any quantity is the marginal seller's cost. Therefore, a plot of the the sellers' cost for each quantity is a plot of the supply curve.

Market Failure

The inability of some unregulated markets to allocate resources efficiently

Willingness to Pay

The maximum amount that a buyer will pay for a good

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.

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 but 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

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 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.