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Welfare Economics
The study of how the allocation of resources affects economic well-being
Allocation
The process of distributing something. An amount or portion of a resource assigned to a particular recipient
Willingness to Pay (WTP)
The maximum amount that a buyer will pay for a good
Consumer Surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Consumer Surplus
Measures the benefit buyers receive from participating in a market
Marginal Buyer
The buyer who would leave the market first if the price were any higher
Demand Curve
Which curve reflects buyers' willingness to pay and can be used to measure consumer surplus
Consumer Surplus
The area below the demand curve and above the price measures ________ in a market
Cost (opportunity cost)
The value of everything a seller must give up to produce a good
Producer Surplus
The amount a seller is paid for (receives) minus the seller's cost of providing it (production)
Supply Curve
Producer surplus is closely related to which curve?
Marginal Seller
The seller who would leave the market first if the price were any lower
Efficiency
A market outcome such that the total well-being of market participants (total surplus) is maximized
Total Surplus
The sum of consumer and producer surplus/The area between the supply and demand curves up to the equilibrium quantity
Equality (equity)
The fairness of the distribution of well-being among members of society
Market Power
Ability to influence prices
Market Failure
The inability of some unregulated markets to allocate resources efficiently
Willingness to sell
The minimum amount that a seller will accept to sell a good
Consumer Surplus
= 1/2 (Pmax-P1) Q1
Producer Surplus
= 1/2 (P1-Pmin) Q1
False
Consumer surplus is the buyer's willingness-to-pay minus the seller's opportunity cost of production
False
If your willingness-to-pay for a hamburger is $3 and you paid $2, then your consumer surplus is $5
True
The opportunity cost of production for a seller includes the implicit cost of the seller's time
True
The height of the supply curve at a selected quantity is the seller's opportunity cost of producing that marginal unit
False
Total surplus (total well-being) is the seller's cost of production minus the buyer's willingness-to-pay
True
The competitive market equilibrium outcome is efficient because it allocates the produced output to the buyers who place the highest value on the good
True
Producer surplus is the area above the supply curve and below the price
True
The competitive market equilibrium outcome maximizes total surplus (total well-being)
False
Producing and consuming more of a good will always increase total surplus (total well-being)
True
Goods purchased by those with highest value, good produced by those with lowest opportunity cost, the well-being of society is maximized
