Chapter7+JDEM





Before jumping into conclusions; let's first define consumer and producer surplus. //Logically, it measures the benefit of the consumers.// __It is the area below the demand curve and above the price__
 * consumer surplus** = (buyer’s willingness to pay for a good) - (amount they actually pay)

__Computed by finding the are below the price and above the supply curve__
 * producer surplus** = amount sellers receive for their goods - costs of production


 * thus, allocation of resources that maximizes consumer and producer surplus : __efficient__ **


 * // What leads to consumer and producer surplus? //

Mr. Ski, Yoda, and the Lightsaber ** This can be explained through a simple scenario. Mr. Ski sells lightsabers. Making one lightsaber costs Mr. Ski a total of $10. Meanwhile, Yoda likes to collect lightsabers. One day, Yoda sees a nice lightsaber in Mr. Ski's show window. He would buy a lightsaber for $15. This is Yoda's willingness to pay. So Yoda goes up to Mr. Ski but finds out its ONLY TEN BUCKS. Here, CONSUMER SURPLUS is formed. $15 (buyer's willingness to pay) - $10 (amount they actually pay ) = $5. Yoda has a consumer surplus of $5. The PRODUCER SURPLUS also works in a similar way. Lets say Yoda is in some space ship war against Uranus. He desperately needs a lightsaber. He would buy a lightsaber for $50 if he can find one. Right then, he spots Mr. Ski's shop, runs in, places $50 on the counter, grabs a lightsaber and runs back out. Now, Mr. Ski has a PRODUCER SURPLUS of $40 because it only cost him $10 to produce one lightsaber but sells it for $50. $50 (amount sellers receive for their goods) - $10 (costs of production = $40; producer surplus.



**// How does a lower price of a good increase the consumer surplus? //** There are __two__ main reasons why this happens. 1. Those who have already planned to buy the item receive more consumer surplus is because they are paying for the product at a lower price 2. Once the price is lower, new buyers enter the market and receive consumer surplus.


 * // How does a higher price raise the producer surplus? //**

__How does a higher price raise the producer surplus?__
1. the producers receive more surplus because they are receiving more for a certain product than before 2. new sellers will enter the market and receive producer surplus on these additional units of items sold



__What is Market Efficiency?__ The economic well-being is measured by total surplus (consumer surplus + producer surplus)
 * // What creates an Efficient Market? //**

__The difference between efficiency and equity?__ Efficiency is maximizing the total surplus by resource allocation to all members of a society Equity is how fair well-being is distributed to members of society

__What happens at the market equilibrium price?__ Two major consequences 1. buyers who value the item will buy the item, the ones who do not value it on the other hand will not buy the item. -> The item is allocated to a buyer who values the item highly 2. sellers who gain benefit by selling the item will produce the product, other will not. the demand of goods is allocated to the sellers who can produce the item for the lowest cost


 * Total surplus is maximized at the market equilibrium!

This sets one of the reasons why Markets are usually a good way to organize economci activity mentioned in chapter 1. (llink)

However, we talked about the market assuming that we are in a perfectively competitive market, and there are no externalities, which is basically impossible in the real world.

=Remember, there is Possibility of a Market Efficiency and Market Failure=



**1. A consumer’s willingness to pay measures** a. the cost of a good to the buyer. b. how much a buyer values a good. c. how much a buyer has to pay to receive a good. d. how much a seller receives from the sale of a good.

a. the greater the availability of close substitutes. b. the narrower the definition of the market. c. the longer the period of time. d. if it is considered a necessity.
 * 2. A good will have a more inelastic demand**

a. quantity demanded changes proportionately more than price. b. price changes proportionately more than income. c. quantity demanded changes proportionately less than price. d. quantity demanded changes proportionately the same as price.
 * 3. Demand is said to be inelastic if the**

a. clothing b. black jeans c. Seven Jeans d. All three would have the same elasticity of demand since they are all related.
 * 4. Which of the following would have the most elastic demand?**

a. a buyer’s willingness to pay. b. the actual price a buyer must pay to get the product. c. the difference between a buyer’s willingness to pay and the actual price of the product. d. All of the above are correct. click here to check your answers
 * 5. A demand curve measures**

**Glossary**
welfare economics : study of how allocation of resources affect economic well-being willingness to pay : the greatest amount a buyer will pay for a certain item consumer surplus : a buyer’s willingness to pay - amount buyer actually pays cost : the value a seller must give up to produce a certain good. producer surplus : the amount a seller is paid - the seller’s cost ex) if it took you 10,000 won to create 10 Big Macs and you sell each one for 5,900 won, there is a surplus. producer cost : the ex) to produce a book, you need to pay for the ink, the paper, the cover, equality: the property of distributing economic prosperity to every member in community. Invisible hand: It's a theory by Adam Smith, that the market will run itself at best condition when government is not intervening with it due to each seller and buyer working for their own benefits.

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