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

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