chapter 3 from class part 1: review of surplus and shortage Flashcards Preview

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1
Q

buyer’s willingness to pay for a good

A

the maximum amount the buyer will pay for that good

WTP measures how much the buyer values the good

2
Q

the marginal buyer

A

the buyer who would leave the market if P were any higher

basically, I the demand curve, the buyer who is not willing to pay if the price just gets a bit higher

there is a marginal buyer is at any height or price of the demand curve

3
Q

consumer surplus

A

the amount a buyer is willing to pay minus the amount the buyer actually pays

CS = WTP – P

consumer surplus will increase everytime price lowers

consumer surplus decreases everytime price increases

4
Q

Suppose P = $260

Mamadou is WTP 300

what is the consumer surplus

A

consumer surplus is $40

5
Q

if mamadou WTP $300

if Chad WTP $175

if Nicholas Gurr WTP $250

if Ben Dover WTP $125

the price is $200, what will be the quantity demanded?

A

quantity demanded is 2

6
Q

total consumer surplus

A

area under the demand curve above the price

from 0 to Q

7
Q

why does the total consumer surplus decrease if price increases?

A

there are more buyers leaving the market

8
Q

cost

A

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

all resources used to produce good, including value of the seller’s time

9
Q

how is cost a measure of a supplier’s willingness to sell?

A

A seller will produce and sell the good/service only if the price exceeds his or her cost

10
Q

marginal seller

A

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

11
Q

producer surplus

A

the amount a seller is paid for a good (its price)minus the seller’s cost

12
Q

what is the total producer surplus?

A

the area above the supply curve under the price

from 0 to Q

13
Q

total surplus

A

CS + PS

total gains from trade in a market

(value to buyers) – (cost to sellers)

14
Q

why do we use total surplus?

A

as a measure of society’s well-being

to see whether the market’s allocation is efficient

15
Q

when is an allocation fo resources efficient?

A

if it maximizes total surplus

16
Q

what does efficiency mean?

A

The goods are consumed by the buyers who value them most highly

The goods are produced by the producers with the lowest costs

Raising or lowering the quantity of a good would not increase total surplus

17
Q

does the market equilibrium maximize total surplus?

A

yeee boyyy

18
Q

why is it impossible for a central planned economy to be efficient and maximize surplus?

A

the planner would need to know every seller’s cost and every buyer’s WTP for every good in the entire economy

19
Q

what are obstacles to efficiency?

A

Equity

Price controls

Taxes and Subsidies

Externalities (side effects)

Public goods

Common resources

Market power

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