Chapter 4: Consumer and Producer Surplus

willingness to pay

the maximum price at which the consumer would buy that good

• depends on taste and budget constraint

individuual consumer surplus

the difference between a buyer’s willingness to pay and the price paid

total consumer surplus

the sum of individual consumer surpluses of all the buyers of a good

where is the total consumer surplus on a demand curve?

the area below the demand curce but above the given price

what are the 2 channels that increases consumer surplus due to a fall in price?

• a gain to consumers who would have bought at the original price

• a gain to consumers who are persuaded to buy by the lower price

cost

the lowest price at which the seller is willing to sell a good

individual producer surplus

the difference between the price received and the seller’s cost

total producer surplus

the sum of the individual producer surpluses of all the sellers of a good

where is the total producer surplus from sales of a good on a graph?

the area above the supply curve but below the given price

when the price of a good rises, what happens to the producer surplus?

the producer surplus increases

how does the producer surplus increase through what 2 channels (when the price of a good rises)?

• the gains of those who supplied the good at the original, lower price

• the gains of those who are induced to supply the good by the higher price

total surplus

the total net gain to consumers and producers from trading in the market

• the sum of the producer and the consumer surplus

when is the maximum possible total surplus achieved?

at the market equilibirum

• the competitive market is efficient

what are the 3 ways that decrease consumer surplus?

• reallocating consumption among consumers

• reallocating sales among sellers

• changing the quantity traded

what 2 things does the market equilibirum do for buyers and sellers?

• buyers are buyers who have the highest willingness to pay

• sellers are sellers who have the lowest cost

property rights

ensures that owners can make any decisions on their products

prices as economic signals

prices provide information that helps people make better economic decisions

what are 3 important caveats?

• market can be efficient but not fair - equity and government intervention is needed

• even when the market equilibrium maximizes totak srplus, it does not mean that it results in the best outcome for every individual consumer and producer

• markets sometimes fail to deliver efficiency - they are not perfect