Chapter+7+Kathy+L.

=//CHAPTER 4//=

 THINK QUESTION CHAPTER AT A GLANCE LECTURE SECTION PRACTICE PROBLEM GLOSSARY

=THINK QUESTION: HOW DO WE CALCULATE "SURPLUS?"=

CHAPTER AT A GLANCE In this chapter, we will learn about two essential economic concepts: willingness to pay and surplus. By learning about how to calculate surplus, we are able to adjust prices to its most efficient level.

LECTURE PROBLEM
WTP Willingness to pay is the maximum amount that a buyer will pay for a good. A good real life demonstration of different people having different levels of willingness to pay is an auction. In the beginning, when the auction starts off with a cheap price, everyone raises up their placards for purchase; this is because, there are many people “wiling to pay” at that price. However, as the price goes up and reaches a certain price, there are only one person raising his placard. This is because the willingness to pay of that person was high.

SURPLUS/ EQUILIBRIUM

All we need to really learn in this chapter is condensed into this ONE graph.



The first thing one can learn from this graph are the different types of surplus.

One type of surplus, we experience a lot is CONSUMER SURPLUS. Consumer Surplus allows to make judgements about the desirability of market outcomes. Consumer surplus can be calculated by willingness to pay for a good minus the amount they actually pay for it. In a sense, consumer surplus is how much we “FEEL” like we are gaining by buying a certain product. For example, let’s say your willingness to pay a certain body lotion is $10, but the actual price is $5. When you buy the lotion, you gain a consumer surplus of $5.

The second type of surplus is right the opposite of consumer surplus and is called producer surplus. Producer surplus can computed by the amount a seller paid minus the production. Producer surplus, contrary to consumer surplus measures the benefit to sellers of participating in a market. Let’s say for a instance that I’m willing to wash my uncle’s car for $20. Being the nice uncle he is, my uncle gives me $40 instead. The producer surplus in this sense will be $20.

A combination of consumer and producer surplus combined is the third type of surplus which we call it as TOTAL SURPLUS. When we are able to MAXIMIZE this total surplus, we say the allocation is efficient. The point of such efficiency is reached at the equilibrium point, where supply and demand crosses.

PRACTICE PROBLEMS

 * 1.**

Consumer surplus is the:
 * || a. || difference between what the consumer is willing to pay and what the consumer has to pay. ||


 * || b. || surplus of goods the consumer has after consuming all he/she needs from them. ||


 * || c. || excess number of goods consumers purchase over and above what they really need. ||


 * || d. || excess number of units firms produce over and above what consumers want to purchase. ||

2. Total Surplus can be calculated as follows:
 * || a. || Value to buyers minus amount paid by buyers. ||


 * || b. || Amount received by sellers minus cost to sellers. ||


 * || c. || Cost to sellers minus value to buyers. ||


 * || d. || Value to buyers minus cost to sellers. ||

3. The producer surplus represents the:
 * || a. || production in a market over and above what consumers wish to purchase. ||


 * || b. || difference between the price of the good and the cost to the seller. ||


 * || c. || left over of raw materials and other inputs that firms have after producing the good. ||

=GLOSSARY=
 * || d. || left over of the good that remains unsold after the Holiday season. ||
 * consumer surplus || the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it ||
 * cost || the value of everything a seller must give up to produce a good ||
 * efficiency || the property of a resource allocation of maximizing the total surplus received by all members of society ||
 * equity || the fairness of the distribution of well-being among the members of society ||
 * producer surplus || the amount a seller is paid for a good minus the seller’s cost of providing it ||
 * welfare economics || the study of how the allocation of resources affects economic well-being ||
 * willingness to pay || the maximum amount that a buyer will pay for a good ||