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Unformatted text preview: C hapter 7
Consumers, Producers, an d t he E f f ic iency of M a r kets I. Overview a. Welfare economics i. The study of how the allocation of resources affects economic well-being II. Consumer Surplus a. Willingness to pay i. Measures how much the buyer values the good 1. The buyers maximum a. Expressed by bidding ii. Definition 1. The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it 2. The benefit of buyers for participating in a market iii. What if you have two identical goods to sell 1. Then take two consumer surpluses and add together b. Using the demand curve to measure consumer surplus i. The area below the demand curve and above the price measures the consumers surplus in a market c. How a lower price raises consumer surplus i. More people are willing to pay at a lower price- thus adding people to the consumer surplus d. What does consumer surplus measure i. Goal 1. Make judgments about desirability of market outcomes ii. Good measure of economic well being 1. Exceptions: drug market → consumer surplus is not a factor because it doesn’t reflect the wellbeing of society III. Producer Surplus a. Cost and the willingness to sell i. Expressed by bid for a job 1. Price starts high but is bid lower ii. Each person is willing to take a job as long as the price they receive is greater than the cost of doing the work 1. Cost → opportunity cost a. Includes cost of goods, as well as time iii. Definition of producer surplus 1. The amount a seller is paid minus the cost of production b. Using the supply curve to measure producer surplus i. Shows marginal gain c. How a higher price raises producer surplus i. More sellers are willing to sell at higher price, adds surplus IV. Market efficiency a. The benevolent social planner i. Total surplus 1. Sum of consumer surplus and producer surplus 2. Value to buyers- cost to sellers ii. Efficiency 1. If an allocation of resources maximizes total surplus ...
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