chapter 7) Welfare Economics: Consumers, Producers, and Market Efficiency

Vocabulary flashcards covering welfare economics, consumer surplus, producer surplus, market efficiency, and foundational economic concepts from Adam Smith.

Welfare Economics

The study of how the allocation of resources affects economic well-being.

Allocation of Resources

The structural distribution of productive inputs that determines how much of each good is produced, which producers produce it, and which consumers consume it.

Willingness to Pay (WTP)

The maximum amount that a buyer will pay for a good, serving as a measure of how much the buyer values that good.

Marginal Buyer

The buyer who would be the first to leave the market if the market price were any higher.

Consumer Surplus (CS)

The amount a buyer is willing to pay minus the amount the buyer actually pays ($CS = WTP - P$); on a graph, it corresponds to the area under the demand curve and above the price, from $0$ to $Q$.

Cost

The value of everything a seller must give up to produce a good (opportunity cost), which measures the seller's willingness to sell.

Marginal Seller

The seller who would be the first to leave the market if the price were any lower.

Producer Surplus (PS)

The amount a seller is paid for a good minus the seller's cost ($PS = P - \text{cost}$); on a graph, it corresponds to the area above the supply curve and below the price, from $0$ to $Q$.

Total Surplus

The sum of consumer surplus and producer surplus ($\text{Total Surplus} = CS + PS = (\text{value to buyers}) - (\text{cost to sellers})$), measuring the total gains from trade in a market.

Efficiency

The property of a resource allocation that maximizes total surplus, ensuring goods are consumed by buyers who value them most and produced by sellers with the lowest costs.

Adam Smith

Scottish philosopher and economist (1723–1790) who authored The Wealth of Nations (1776) and introduced the concept of the market being led by an invisible hand.

Invisible Hand

The metaphor describing how self-interested individuals in a competitive market economy are guided to unintentionally promote the general economic well-being of society.

Laissez Faire

A French term meaning "allow them to do," referring to the economic doctrine that government should not interfere with the market.

Market Power

The ability of a single buyer or seller (or small group of them) to substantially influence market prices, which can cause market failure.

Externality

A side effect of a market transaction that affects uninvolved bystanders (such as pollution), leading to an inefficient allocation of resources.