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Chap 7 - Chapter7 Consumers Producers&the Efficiencyof...

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Copyright  ©  2006  Nelson, a division of Thomson Canada Ltd. Chapter 7 Consumers, Producers & the Efficiency of Markets
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Copyright  ©  2006  Nelson, a division of Thomson Canada Ltd. Revisiting the Market Equilibrium Do the equilibrium price and quantity maximize  the total welfare of buyers and sellers? Market equilibrium reflects the way markets  allocate scarce resources.  Whether the market allocation is desirable can be  addressed by welfare economics.
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Copyright  ©  2006  Nelson, a division of Thomson Canada Ltd. Welfare Economics Welfare economics :   the study of how the  allocation of   resources affects economic well- being. Buyers and sellers receive benefits from  participating in the market.  Equilibrium in the market results in maximum  benefits, and therefore maximum total  welfare for both the consumers and the  producers of the product.
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Copyright  ©  2006  Nelson, a division of Thomson Canada Ltd. Consumer Surplus Every buyer in an economy is only willing to  pay up to a certain amount for a good or  service. We define: Willingness-to-pay : the maximum amount that  a buyer will pay for a good.    - measures the value the buyer places on the    good    - also called  reservation price When a buyer actually pays less than he/she is  willing to pay, they enjoy a benefit. We define:
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Copyright  ©  2006  Nelson, a division of Thomson Canada Ltd. Consumer surplus :   the buyer’s willingness to  pay for a good minus the amount the buyer  actually pays for it. The market demand curve depicts the various  quantities that buyers would be willing and  able to purchase at different prices.      - it depicts consumers’ willingness-to-pay.
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Copyright  ©  2006  Nelson, a division of Thomson Canada Ltd. Suppose the market price of a good is $50.
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