Consumers, Producers, and the Efficiency of Markets

These flashcards cover key concepts from the chapter on consumers, producers, and market efficiency, focusing on definitions of economic terms related to welfare economics, consumer and producer surplus, and the efficiency of market outcomes.

Welfare Economics

Studies how the allocation of resources affects economic well-being.

Consumer Surplus (CS)

The benefits buyers receive from participating in a market, calculated as WTP - P.

Willingness to Pay (WTP)

The maximum amount a buyer will pay for a good.

Producer Surplus (PS)

The benefits sellers receive from participating in a market, calculated as P - cost.

Total Surplus

The sum of consumer and producer surplus.

Market Efficiency

Occurs when the allocation of resources maximizes total surplus.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded.

Supply Curve

A graph showing the relationship between the price of a good and the quantity supplied.

Equilibrium

The point where the quantity demanded equals the quantity supplied.

Opportunity Cost

The value of the next best alternative forgone when making a decision.

Externalities

Costs or benefits that affect third parties who are not involved in a market transaction.

Marginal Buyer

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

Cost

The value of everything a seller must give up to produce a good.

Allocation of Resources

Determines how much of each good is produced, which producers produce it, and which consumers consume it.

Market Power

A situation where a single buyer or seller controls market prices.

Efficiency of Markets

Markets allocate resources efficiently, maximizing total benefits to buyers and sellers.