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

Welfare Economics

measuring the welfare of consumers and producers in a market

Willingness to Pay (Threshold Value)

the maximum amount someone is willing and able to pay for something

Consumer Surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer Surplus

difference between the price suppliers actually receive and the minimum price they would be willing to accept

Cost/Producer Threshold Value

the value of everything a seller must give up to produce a good

Market Efficiency

a resource allocation in which all potential gains from trade have been realized and describes the extent to which market prices reflect all available information

Consumer Sovereignty

the production of goods and services according to individual demand

The Benevolent Social Planner

a hypothetical economic figure who makes decisions to maximize society's total welfare and efficiency

Efficiency

a situation that occurs when all activities generating more benefits are undertaken and no activities are undertaken for which the costs exceeds the benefit

Equality

refers to the distribution of wealth and income, with equality aiming for identical outcomes and equity focusing on fairness in opportunity and treatment

Efficiency of the Equilibrium Quantity

resources are used in the most socially desirable way, maximizing the total welfare for society

Market Failure

a situation where the allocation of goods and services by a free market is not efficient, leading to a suboptimal outcome for society

Conditions for Market Efficiency

• Well defined private property rights

• Competitive markets

• No externalities

• Accurate information for consumers and producers