Consumer & Product Surplus

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5 Terms

1
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willingness to pay (WTP)

the max amount that a buyer is willing to pay for a good; measures how much the buyer values the good or service

the height of a demand curve

2
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consumer surplus (CS)

CS = WTP - P

area between demand and price on a graph

3
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marginal cost (MC)

cost of producing an additional unit

the height of the supply curve

4
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producer surplus (PS)

PS = P - MC

area between supply and price

measures the benefit to sellers participating in a market

5
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market efficiency

  1. who gets it: supply to buyers, high value, measured by WTP

  2. who produces it: demand to sellers for least cost

  3. how many are produced: quantity maximizes sum of CS + PS