Chapter+7+-+Micro

 = Ch.7 Consumers, Producers, and the Efficiency of Markets =

This chapter is about welfare economics, the study of how the allocation of resources affects economic well-being. We will examine the benefits buyers and sellers gain from the market, and examine how they can make their benefits as large as possible. Final conclusion is: The total surplus of buyers and sellers is maximized when the market is in equilibrium.

Willingness to Pay
Willingness to pay is the maximum amount that a buyer will pay for a good. In other words, it measures how much each buyer values the good. Therefore, buyers will buy the good only when the actual price is lower than their willingness to pay. They do this because there is consumer surplus, which is the amount a buyer is willing to pay minus the actual price. Consumer surplus measures the benefit buyers get by participating in a market.

Using the Demand Curve to Measure Consumer Surplus
Since the demand curve reflects buyers’ willingness to pay, we can use it to measure consumer surplus. On the graph, the area below the demand curve (willingness to pay) and above the price (amount buyers actually pay) measures the consumer surplus. 

 How a Lower Price Raises Consumer Surplus
Because buyers always want to pay less, they are better off when a price falls causing increase in consumer surplus. This increase in consumer surplus has two parts. First, those who were already buying the good are better off because now they need to pay less. Second, new buyers enter the market because now they are willing to buy the good.

What Does Consumer Surplus Measure?
Consumer surplus measures the benefit that buyers receive as the buyers themselves perceive it. Therefore, it is a good measure of economic well-being in preferences of buyers.

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Producer Surplus

 * Producers surplus: the amount a seller is paid for a good minus the seller's cost of providing it**

Cost: the value of everything a seller must give up to produce a good**
 * P.S. = Price - Cost

Producer surplus can be seen as the profit the seller makes by selling a good. On a supply and demand graph, the supply curve is the Cost.

Market Efficiency
To have the most efficiency in a market, you must maximize total surplus
 * Total Surplus = Consumer surplus + Producer surplus**
 * Consumer surplus = Value to buyers - Amount paid by buyers**
 * Producer surplus = amount received by sellers - cost to sellers**

Summery:

 * total surplus determines the market efficiency
 * equilibrium price is the price that maximizes total surplus
 * Consumer surplus is the value of a good to the buyer minus the actual price paid
 * Producer surplus is the price that the seller gets minus the cost of making that good
 * total surplus is consumer surplus plus producer surplus

Questions:

 * 1) When the buyers are willing to pay 10 dollars but only pay 6 dollars, what is the consumer surplus?
 * 2) When a good is sold for 40 dollars but the cost of making the good is 40 dollars, what is the producer surplus?
 * 3) When is the total surplus maximized?


 * Answers**
 * 1) 4 dollars
 * 2) there is no surplus
 * 3) at the equilibrium price

Key Terms welfare economics-study of how economic well-being is influenced by allocation of resources willingness to pay- the maximum amount of money buyers will pay for a good consumer surplus- buyer's willingness to pay minus the actual price cost- the amount of money sellers give up to produce a good producer surplus- the actual price minus seller's cost efficiency- the property of market maximizing the total surplus of buyers and sellers equity- the equalness in the distribution of well-being in a country