econ chapter 7

what is a willingness to pay?

a buyers maximum price they are willing to pay — it measures how much someone values each good

what is consumer surplus?

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it — measures the benefit buyers receive from participating in a market

it is a good measure of economic well-being

what does a demand curve show us about consumer surplus?

At any quantity, the price given by the demand curve shows the willingness to pay of the marginal buyer – the buyer who would leave the market first if the price were any higher

it can also be used to measure consumer surplus

• The area below the demand curve and above the price measures the consumer surplus in a market

  • The difference between the willingness to pay and the market price is each buyer’s consumer surplus

    • The area between the demand curve and a price line is the sum of the consumer surplus of all buyers in the market

how does a lower price affect consumer surplus?

it raises it

what is willingness to sell?

the lowest price someone would accept for their work/to sell their services

what is producer surplus?

the amount a seller is paid minus his cost of production — measures how much a seller benefits from participating in a market

what is a marginal seller?

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

what does a supply curve tell us about producer surplus?

• The area below the price and above the supply curve measures the producer surplus in a market

  • Height of the supply curve measures sellers’ costs, and the difference between price and cost of production is each seller’s producer surplus

    • The area between the price line and the supply curve is the sum of all sellers’ producer surplus

how does a higher price affect producer surplus?

it raises it

what is total surplus?

• Total surplus = value to buyers - cost to sellers

  • The total surplus in a market is the total value to buyers of the goods, measured by their willingness to pay, minus the total cost to sellers of providing those goods.