Welfare Economics and Market Efficiency

This set of vocabulary flashcards covers the fundamental concepts of welfare economics, including consumer and producer surplus, total surplus, and market efficiency based on the Week 7 lecture notes.

Welfare Economics

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

Willingness to Pay (WTP)

The maximum amount that a buyer will pay for a good; a buyer purchases only if $\text{WTP} \ge \text{Price}$.

Consumer Surplus (CS)

The gain buyers get from participating in the market, calculated as $CS = \text{WTP} - \text{Price}$. Graphically, it is the area below the demand curve and above the price.

Willingness to Sell (WTS)

The minimum amount that a seller will accept for a good; a seller produces only if $\text{Cost} \le \text{Price}$.

Producer Surplus (PS)

The gain sellers get from participating in the market, calculated as $PS = \text{Price} - \text{Cost}$. Graphically, it is the area above the supply curve and below the price.

Marginal Buyer

The buyer who would leave the market if the price were any higher; their willingness to pay is shown by the height of the demand curve at any quantity.

Marginal Seller

The seller who would leave the market if the price were any lower; their cost is shown by the height of the supply curve at any quantity.

Total Surplus

A measure of the economic well-being of everyone in society, calculated as $CS + PS$ or $\text{Value to Buyers} - \text{Cost to Sellers}$.

Efficiency

An allocation of resources that maximizes Total Surplus, representing the total size of the economic 'pie'.

Equality

The property of distributing economic prosperity uniformly among society, representing how the economic 'pie' is sliced.

Market Equilibrium Efficiency

The condition where total surplus is maximized because buyers with $\text{WTP} \ge \text{Price}$ buy the good and sellers with $\text{Cost} \le \text{Price}$ sell the good.

Underproduction (Qty below Equilibrium)

A state where the marginal buyer's value is greater than the marginal seller's cost; increasing output will increase total surplus.

Overproduction (Qty above Equilibrium)

A state where the marginal buyer's value is less than the marginal seller's cost; decreasing output will increase total surplus.