eco9.26 - •Consider: 11 potential buyer who can buy 1...

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Exam 1—4, 5, 6, 21 Chapter 7 Welfare Economics Welfare economics is the study of how the allocation of resources effects economics well-being. •Buyer and sellers receive benefits from taking part in the market. •The equilibrium in a market maximizes the total welfare of buyers and sellers. Consumers, Producers and the Efficiency of Markets •Welfare Economics •Consumer surplus measures economic welfare from the buyer’s side •Producer surplus measures economic welfare from the seller’s side. Consumer Surplus Willingness to pay is the maximum amount that a buyer will pay for a good. •Consumer surplus is the buyer’s willingness to pay for a good minus that amount that buyer actually pays for it. •It measures how much he buyer values the good or service. Example: Construction of a new road
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Unformatted text preview: •Consider: 11 potential buyer who can buy 1 unit/day •Willingness to pay: $11, 10, 9… •P = $6/unit Using the Demand Curve to Measure Consumer Surplus •The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different price •The area below the demand curve and above the price measures the consumer surplus in the market •Example: Market for milk Producer Surplus •Producer Surplus is the amount a seller is paid for a good minus the seller’s cost. •It measures the benefits to sellers participating in the market. •Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost. •Free markets produce the quantity of goods that maximizes the sum of consumers and producer surplus....
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This note was uploaded on 04/20/2008 for the course ECON 304K taught by Professor Ledyard during the Spring '08 term at University of Texas.

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