Chapter+7+Consumers,+Producers,+and+the+Efficiency+of+Markets+(Joon,+Scott,+and+Steven)

Key Terms:

 * Welfare Economics**: the study of how the distribution of resources influence the welfare of the economy.
 * Willingness to Pay:** The maximum amount that a buyer will pay for a particular good.
 * Consumer Surplus:** The amount a buyer is wiling to pay for a good subtracted by the amount the buyer actually pays.
 * Cost**: The value of everything a seller must sacrifice to produce a good.
 * Producer Surplus**: the amount a seller is paid for a good subtracted by the seller's cost of producing it.
 * Efficiency:** The property of a resource distribution of maximizing the total surplus of all members of society.
 * Equity:** the fairness of distribution of resources.

Key Concepts
 * Consumer is a synonym for buyer.

CONSUMER
It's simple, you a consumer or buyer, how much are you willing to pay? Because you have a set willingness to pay, you either gain or lose. This is called **Consumer Surplus**. Consumer surplus is the price willing to pay minus the buyers actually pay. For example, if I walk into a store to buy a cup of coffee, and I was willing to pay maximum of $5, but the coffee was $3, then my consumer surplus is $2. $5- $3= $2.
 * Willingness to Pay**

Graph of Consumer Surplus. This graph represents how much(quantity) you want to buy at a certain price through the demand curve. Let's say the price the item you want to buy is p (y-aixis). The triangle colored in gray represents your consumer surplus. http://images.google.co.kr/imglanding?imgurl=http://phoenix.liu.edu/~tbarr/eco61/png/consumer-surplus-triangle.png&imgrefurl=http://phoenix.liu.edu/~tbarr/eco61/book/chapter7.html&usg=__JHFcBWEfSiTGXQPB6uDobAGIkVY%3D&h=576&w=576&sz=974&hl=ko&um=1&tbnid=68WmnID5mMZUZM:&tbnh=134&tbnw=134&prev=/images%3Fq%3Dconsumer%2Bsurplus%2Bgraph%26ndsp%3D18%26complete%3D1%26hl%3Dko%26lr%3D%26sa%3DN%26start%3D36%26um%3D1%26newwindow%3D1&q=consumer+surplus+graph&ndsp=18&complete=1&lr=&sa=N&start=38&um=1&newwindow=1#
 * Consumer surplus is a good way to measure economic well-being

PRODUCER SURPLUS
Now that you understand consumer surplus. What do you think producer surplus is?

Producer surplus is the amount a seller is paid minus the cost of production. For example, let's say I make iPods. It makes $50 dollars to produce an iPod, but I sell it for $120. My producer surplus is $70. http://www.youth2freetrade.cn/images/image016.gif

Above is a graph that represents producer surplus. The linear supply graph show how much a producer is willing to produce at a certain price. P1 is that certain price, and the purple triangle represents the producer surplus. This means that a a raise in price in the item raises producer surplus. A decrease in the price will lower the producer surplus. Raising the price is good for the producer; lowering the price is bad for the producer.

Market Efficiency
To evaluate market efficiency, you need to use total surplus. Consumer surplus = value to buyers-amount paid by buyers. Producer surplus= amount received by sellers - cost to sellers Total Surplus= Value to buyers - cost to sellers Total Surplus=consumer surplus + producer surplus

If the distribution of resources maximizes total surplus, then the allocation is exhibiting efficiency.

Another important factor of an economy is equity. Equity is a measure of how fairly the resources are distributed.

The graph above shows equilibrium. Is equilibrium efficient? Does it maximize total surplus? 1. Free markets distribute the supply of goods to the buyers who value them most highly(willingness to pay)/ 2. Free markets distribute the demand for goods to the sellers who can produce them at the lowest cost. 3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
 * EVALUATING MARKET EQUILIBRIUM**

Therefore, equilibrium is the most efficient.

Conclusion: This chapter introduced the basics of economics - consumer and producer surplus. We now know how a market works and know when the market efficient. Prices can not be determined by a single person in a competitive market. One way of analyzing the market is through cost-benefit analysis.

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