ch07 - Chapter7 Consumers,Producers,andEfficiencyofMarkets 7

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Chapter 7/Consumers, Producers, and Efciency oF Markets 131 Chapter 7 Consumers, Producers, and Efciency oF Markets WHAT’S NEW IN THE THIRD EDITION: There is a new Case Study on “Should There Be a Market in Organs?” A new In the News box (“How the Pilgrims Embraced the Market”) has also been added. LEARNING OBJECTIVES: By the end of this chapter, students should understand: the link between buyers’ willingness to pay For a good and the demand curve. how to de±ne and measure consumer surplus. the link between sellers’ costs oF producing a good and the supply curve. how to de±ne and measure producer surplus. that the equilibrium oF supply and demand maximizes total surplus in a market. CONTEXT AND PURPOSE: Chapter 7 is the ±rst chapter in a three-chapter sequence on welFare economics and market efciency. Chapter 7 employs the supply and demand model to develop consumer surplus and producer surplus as a measure oF welFare and market efciency. These concepts are then utilized in Chapters 8 and 9 to determine the winners and losers From taxation and restrictions on international trade. The purpose oF Chapter 7 is to develop welfare economics —the study oF how the allocation oF resources a²ects economic well-being. Chapters 4 through 6 employed supply and demand in a positive Framework, which Focused on the question, “What is the equilibrium price and quantity in a market?” This chapter now addresses the normative question, “Is the equilibrium price and quantity in a market the best possible solution to the resource allocation problem or is it simply the price and quantity that balance supply and demand?” Students will discover that under most circumstances the equilibrium price and quantity is also the one that maximizes welFare. 7 CONSUMERS, PRODUCERS, AND E³³ICIENCY O³ MARKETS
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132 Chapter 7/Consumers, Producers, and Efciency oF Markets KEY POINTS: 1. Consumer surplus equals buyers’ willingness to pay For a good minus the amount they actually pay For it, and it measures the bene±t buyers get From participating in a market. Consumer surplus can be computed by ±nding the area below the demand curve and above the price. 2. Producer surplus equals the amount sellers receive For their goods minus their costs oF production, and it measures the bene±t sellers get From participating in a market. Producer surplus can be computed by ±nding the area below the price and above the supply curve. 3. An allocation oF resources that maximizes the sum oF consumer and producer surplus is said to be efcient. Policymakers are oFten concerned with the efciency, as well as the equity, oF economic outcomes. 4. The equilibrium oF supply and demand maximizes the sum oF consumer and producer surplus. That is, the invisible hand oF the marketplace leads buyers and sellers to allocate resources efciently.
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This note was uploaded on 11/16/2009 for the course ECO 1001 taught by Professor Dr.sum during the Fall '08 term at Al Ahliyya Amman University.

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ch07 - Chapter7 Consumers,Producers,andEfficiencyofMarkets 7

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