Microeconomics Chapter 4: Consumer and Producer Surplus

Vocabulary flashcards covering key definitions, formulas, and concepts from Microeconomics Chapter 4 by Paul Krugman and Robin Wells.

Willingness to Pay

The maximum price at which a consumer would buy a good, determined by their tastes and budget constraint.

Individual Consumer Surplus

The net gain to an individual buyer from purchasing a good, calculated as $\text{Individual Consumer Surplus} = \text{Willingness to Pay} - \text{Price Paid}$

Total Consumer Surplus

The sum of the individual consumer surpluses of all buyers of a good in a market, represented graphically as the area below the demand curve but above the price.

Cost

A potential seller's cost is the lowest price at which he or she is willing to sell a good.

Individual Producer Surplus

The net gain to an individual seller from selling a good, calculated as $\text{Individual Producer Surplus}=\text{Price Received}-\text{Cost}$ .

Total Producer Surplus

The sum of the individual producer surpluses of all sellers of a good in a market, represented graphically as the area above the supply curve but below the price.

Total Surplus

The total net gain to consumers and producers from trading in a market, calculated as $\text{Total Surplus} = \text{Consumer Surplus} + \text{Producer Surplus}$.

Channels of Consumer Surplus Increase

When market price falls, consumer surplus increases via two channels: gains to original buyers who pay less, and gains to new buyers induced to purchase by the lower price.

Channels of Producer Surplus Increase

When market price rises, producer surplus increases via two channels: gains to original sellers who receive a higher price, and gains to new sellers induced to supply by the higher price.

Market Efficiency

A market outcome in which the maximum possible total surplus is achieved, allocating consumption to buyers with the highest willingness to pay and sales to sellers with the lowest cost.

Reallocating Consumption

Taking a good away from buyers who would have purchased it in market equilibrium and giving it to potential consumers who would not have bought it in equilibrium, which decreases consumer surplus.

Reallocating Sales

Taking sales away from sellers who would have sold the good in market equilibrium and compelling potential sellers who would not have sold it in equilibrium to sell, which decreases producer surplus.

Property Rights

The rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose.

Prices as Economic Signals

The function of prices in providing information that helps consumers and producers make better economic decisions.

Equity

Fairness in the allocation of resources, which often conflicts with economic efficiency.

Market Failure

A situation in which a market fails to deliver efficiency and no longer maximizes total surplus.

Sources of Market Failure

The three principal sources that prevent markets from achieving efficiency: market power, externalities, and the specific nature of certain goods (e.g., private information, public goods).