Chapter 7 Notes - Chapter 7 Notes Consumers Producers and...

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Chapter 7 Notes: Consumers, Producers, and the Efficiency of Markets Buyers always want to pay less, and sellers always want to get paid more Is there a right price from the standpoint of society as a whole? Welfare economics the study of how the allocation of resources affects economic well-being o Examine benefits that buyers and sellers receive from taking part in a market o Examine how society can make these benefits as large as possible The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers Consumer Surplus Willingness to Pay The maximum amount that a buyer will pay for a good Each buyer would be eager to buy the album at a price less than his willingness to pay At a price equal to his willingness pay o He would be indifferent about buying the good If price is exactly the same as the value he places on the album o He would be equally happy buying it or keeping the money Consumer surplus o The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it o Measures the benefit to buyers of participating in a market Using the Demand Curve to Measure Consumer Surplus consumer surplus is closely related to the demand curve for a product the demand schedule is derived from the willingness to pay at any quantity, the price given by the demand curve shows the willingness to pay of the marginal buyer o the buyer who would leave the market first if the price was any higher can also use demand curve to measure consumer surplus
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the area below the demand curve and above the price measures the consumer surplus in the market o the height of the demand curve measures the value buyers place on the good
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