Microeconomics - Chapter 7 Other definitions

Free markets allocate the demand for goods to

the sellers who can produce them at least cost

free market

is considered to be the best way to maximize the sum of consumer and producer surplus in the economy

Total surplus

is the sum of consumer and producer surplus

Total surplus

is the sum of consumer and producer surplus which is the area between the supply and the demand curves up to the equilibrium quantity

The equilibrium price leads to three favourable outcomes:

1. Free markets allocate the supply of products to the buyers who value them the most, as measured by more willingness to pay. Thus, if consumers with the most willingness to pay for the product actually obtain it, then the consumer surplus (which equals willingness to pay minus amount paid) is maximized. 2. Free markets allocate the demand for products to the sellers who can produce them at the lowest production cost. Thus, producer surplus (which equals amount received minus production cost) is maximized. 3. The equilibrium quantity marked in the figure maximizes total surplus—the sum of consumer plus producer surplus.

A reduction in the product's price raises consumer surplus due to two reasons.

1.existing buyers now pay a lower price 2.a lower price induces new buyers to enter the market

producer surplus =

amount received by sellers - cost to sellers

market equilibrium maximizes the sum of producer and consumer surplus

because at quantities less than the equilibrium quantity, the value to the buyers exceeds the cost to the sellers. At the same time, at quantities greater than the equilibrium quantity, the cost to the sellers exceeds the value to the buyers. Therefore, the market equilibrium maximizes the sum of producer and consumer surplus.

Consumer surplus may not be a good measure of economic well-being in some markets

because it is based on the assumption that consumers are rational when they make decisions and that their preferences should be respected. This may not be true of consumers of cigarettes and other addictive products.

what tools economics use to study the welfare of buyers and sellers in a market

consumer surplus and producer surplus

We classify society into two general groups:

consumers and producers

The economic well-being of society would be maximized by

generating the most surplus for its two groups—consumers and producers

consumer surplus

measures the area below the demand curve and above the price

producer surplus

measures the area below the price and above the supply curve

consumer surplus

measures the benefit that buyers receive from a good as the buyer themselves perceive it

producer surplus

measures the benefit to sellers of participating in a market

The height of the supply curve reflects

sellers' costs

welfare economics

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

Free markets allocate the supply of goods to

the buyers who value them most highly

producer surplus

the difference between the price and cost of production

consumer surplus

the difference between willingness to pay and the market price

Markets will NOT allocate resources efficiently if

there are externalities

For an efficient allocation of society's scarce resources

total surplus should be maximized

consumer surplus =

value to buyers - amount paid by buyers

total surplus =

value to buyers - amount paid by buyers + amount received by sellers - cost to sellers

total suplus =

value to buyers - cost to sellers

Interference with free market equilibrium—for example, in the form of taxes or trade restrictions

would decrease the welfare of members of society