econ chap 5 - efficiency

what does surplus measure

the beenfit that people recieve when they buy something for less than they would have been willing to pay/sell something for more than they would have been willing to accept

what does equilibirum price/quantity do

maximizes the total well-being of thjose involved

how to see who benefits and loses from taxes / min wages

surplus

efficiency

add definition

willingess to pay

the maximum price that a buyer would be willing to pay for a good or service

reservation price

same thing as willingness to pay - interchangeable

willingness to sell

reserve price - the minimum price that a seller is willing to accept in exchange for a good or service

willingness to pay is the point at which…

…the benefit that a person will get from the camera = benefit of spending the money on another alternative (opportunity cost)

• lower price → benefit outweighs the opportunity cost

• max willingness to pay → opportunity cost> benefits

if the opportunity cost is zero…then what is the starting price likely to be

very veyr low (1 cent). anything is better than nothing

in market where manufacturers r producing and selling new products, the minimum price has to be…

high enough to make it worth their while to continue making new products

surplus

a way of measuring who benefits from transactions and by how much

surplus is the difference between…

the price at which a buyer or seller would be willing to trade and the actual price

consumer surplus

the net benefit that a consumer receives from purchasing a good or service, measured by the difference between willingness to pay and the actual price

consumer surplus calculations

adding up all the surplus differences of each individual in consumer of the market

what is the consumer surplus on a graph

UNDERNEATH demand curve

ABOVE horizontal line of eq price

how does a decrease/increase in price affect buyers

since buyers prefer prices to be lower

• decrease → better off

• increase → worse off

when people buy at higher prices, they have a smaller individaul surplus than they had at the lower price

producer surplus

the net benefit that a producer receives from the sale of a good or service, measured by the difference between the producer’s willingness to sell and the actual price

• even if it’s just a seller and not an actual producer

seller always prefer prices to be higher, so

• decrease in price makes them worse off

• increase in price makes them better off

producer surplus

area BELOW the horizontal line of eq price

ABOVE the supply curve

total surplus

a measure of the combined benefits that everyone receives from participating in an exchange of goods or services

consumer surplus + producer surplus

total surplus is represented graphically by…

total area between the supply and demand curves, to the LEFT of the eq point

zero-sum game

a situation in which whenever one person gains, another loses an equal amount, such that the net value of any transaction is zero

concept of surplus shows that both buyers and sellers are winners, or losers?

winners, since each gains a surplus

efficient market

an arrangement such that no exchange can make anyone better off without someone becoming worse off

• does not imply equity

reassignmnet of surplues

• sellers gaining some well-eing at the expense of buyers (when price was raised)

• buyers gaining some well-being at the expense of sellers (when price is lowered)

what happens when an artificially high price is imposed in terms of consumer surplus

• consumers lose surplus due to the reduced number of transactions

• the higher price buyers have to pay on the reamining transactions

what happens when an artificially high price is imposed in terms of producer surplus

• producers lose some surplus fro the transactions that would have taken place under eq and no longer do

• they gain more syrplus from the higher price on transactions that do still take place

• whichever “wins” → detemrins whether the producer surplus increases or decreases overall

a price below the market EQ will ALWAYSSS reduce…

producer surplus

• this MIGHT increase or decrease consumer surplus: the outcome depends on how much surplus is gained by those who buy at a lower price compared to what is lost to those who can no longer buy at all

deadweight loss

a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity

• any move away from rq price/quantity creates this

how to calculate deadweight loss

1) subtract total surplus after a market intervention from total surplus at the EQ beforeeee the intervention

2) determine the area of the triangle on a graph

missing market

people who would like to make exhcnages but cannot, we miss opportunities for mutual benefit

• market is “missing”

• ask why a markte is missing

reasons for missing markets

• policy prevents the market from exisisting (banned goods)

• tax on a good, leads to fewer transactions

• lack of accurte info between buyer and sellers

• lack of tech

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