Chapter 7: Consumers, Producers, and the Efficiency of Markets

Microeconomics vocabulary flashcards covering concepts of welfare economics, consumer and producer surplus, market efficiency, and market failure.

Welfare Economics

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

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it, calculated as: $\text{Consumer Surplus} = \text{Willingness to Pay} - \text{Price Paid}$.

Willingness to Pay

The maximum amount that a buyer will pay for a good, representing how much the buyer values that good.

Marginal Buyer

The buyer who would leave the market first if the price were any higher; the height of the demand curve at any given quantity reflects this buyer's willingness to pay.

Graphical Rule for Consumer Surplus

The area below the demand curve and above the price line, represented for any price $\text{P}$ as $\int_0^Q (\text{WTP}(q) - P) dq$.

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it, calculated as: $\text{Producer Surplus} = \text{Price Received} - \text{Cost}$.

Cost

The value of everything a seller must give up to produce a good, including all expenses and the value of their time (opportunity cost).

Marginal Seller

The seller who would leave the market first if the price were any lower; represented by the height of the supply curve.

Total Surplus

The sum of consumer and producer surplus, which can be expressed as: $\text{Total Surplus} = \text{Value to Buyers} - \text{Cost to Sellers}$.

Benevolent Social Planner

A hypothetical character with unlimited power and complete knowledge who aims to maximize the total economic well-being of everyone in society.

Efficiency

The property of a resource allocation of maximizing the total surplus received by all members of society.

Equality

The property of distributing economic prosperity uniformly or fairly among the members of society.

Invisible Hand

A term coined by Adam Smith describing how market forces of supply and demand guide self-interested buyers and sellers to maximize total surplus.

Market Failure

The inability of some unregulated markets to allocate resources efficiently, often caused by market power or externalities.

Market Power

The ability of a single buyer or seller (or a small group) to influence and distort market prices, moving quantities away from the competitive equilibrium.

Externalities

Side effects of a transaction that affect third parties not directly involved in the buying or selling, such as pollution or second-hand smoke.