Ch05 - Chapter 5: Efficiency and Equity Objectives: Explain...

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Chapter 5: Efficiency and Equity Objectives: Explain the connection between demand and marginal benefit and define consumer surplus Explain the connection between supply and marginal cost and define producer surplus Explain the conditions under which markets move resources to their highest-value uses and the sources of inefficiency in our economy
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Demand and Marginal Benefit Demand, Willingness to Pay, and Value Value is what we get, price is what we pay. The value of one more unit of a good or service is its marginal benefit . We measure value as the maximum price that a person is willing to pay. But willingness to pay determines demand. A demand curve is a marginal benefit curve.
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Demand and Marginal Benefit Individual Demand and Market Demand The relationship between the price of a good and the quantity demanded by one person is called individual demand . The relationship between the price of a good and the quantity demanded by all buyers in the market is called market (or aggregate) demand .
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Demand and Marginal Benefit At $1 a slice, the quantity demanded by Lisa is 30 slices and by Nick is 10 slices. The quantity demanded by all buyers in the market is 40 slices.
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Demand and Marginal Benefit The market demand curve is the horizontal sum of the individual demand curves.
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Demand and Marginal Benefit Consumer Surplus Consumer surplus is the value of a good minus the price paid for it, summed over the quantity bought. It is measured by the area under the demand curve and above the price paid, up to the quantity bought.
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Demand and Marginal Benefit Lisa and Nick pay the market price, which is $1 a slice. The value Lisa places on the 10 th slice is $2. Lisa’s consumer surplus from the 10 th slice is the value minus the price, which is $1.
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Demand and Marginal Benefit At $1 a slice, Lisa buys 30 slices. So her consumer surplus is the area of the green triangle.
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Demand and Marginal Benefit At $1 a slice, Nick buys 10 slices. So his consumer surplus is the area of the green triangle.
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Demand and Marginal Benefit At $1 a slice, the consumer surplus for the economy is the area under the market demand curve above the market price, summed over the 40 slices bought.
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Demand and Marginal Benefit At $1 a slice, Lisa spends $30, Nick spends $10, and together they spend $40 on pizza. The consumer surplus is the value from pizza in excess of the blue area which is the expenditure on it.
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Supply and Marginal Cost Supply, Cost, and Minimum Supply-Price Cost is what the producer gives up, price is what the producer receives. The cost of one more unit of a good or service is its
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Ch05 - Chapter 5: Efficiency and Equity Objectives: Explain...

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