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

willingness to pay

a buyer’s maximum price they’ll pay for a good, measures how much they value the good

consumer surplus

amount a buyer is willing to pay for a good - amt buyer actually pays

**meausres benefit buyers receive from participating in a market

total consumer surplus

add together consumer surpluses from people involved in market

marginal buyer

the buyer who would leave the market first if the price were any higher (the price given by the demand curve shows the willingness to pay of the marginal buyer)

consumer surplus on a graph

= area below the demand curve and above the price

how does a lower price affect consumer surplus?

increases it overall **look at graphs and practice making them

consumer surplus

the benefit buyers derive from a market as the buyers themselves perceive it

**good measure of economic well-being for policymakers

producer surplus

amount a seller is paid minus cost of production

**measures how much a seller benefits from participating in a market

marginal seller

seller who would leave the market first if the price were lower

at any quantity, the price given shows the cost of the marginal seller

producer surplus on a graph

= area below the price and above supply curve

how does a higher price affect producer surplus

increases producer surplus **look at graphs

total surplus

sum of consumer and producer surplus

**helps measure societal well-being

= value to buyers - cost of sellers

efficiency

when an allocation of resources maximizes total surplus

**if not efficient, some potential gains from trade among buyers and sellers are not being realized

2 important insights about market outcomes

competitive markets allocate supply of goods to the people who value them most as measured by their willingness to pay

competitive markets allocate the demand for goods to the sellers who can produce them at the lowest cost

can social planners raise well-being by increasing/decreasing quantity of a good?

no, competitive markets prduce the quant of goods that maximizes the sum of consumer and producer surplus

laissez-faire translation

French expression = “leave to do” or “let people do as they will”

does society need social planers to intervene

no, invisible hand does it for them

market power

monopoly, when one person controls entire market price

externalities

effect of a decision on bystanders

market failure

inability of unregulated markets to allocate resources efficiently, includes externalities and market power