Lesson 4 Notes - Chapter 9 Overall Summary Explain what consumer surplus producer surplus and total wealth generated by a market are Consumer Surplus-is

Lesson 4 Notes - Chapter 9 Overall Summary Explain what...

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Chapter 9 Overall Summary-­‐ Explain what consumer surplus, producer surplus and total wealth generated by a market are. Consumer Surplus-­‐ is the difference between the maximum price consumers are willing to pay and the price they actually pay. It is the net gain derived by the buyers of the good. Producer Surplus-­‐ The difference between the price suppliers actually receive and the minimum price they would be willing to accept. It measures the net gains to producers and resource suppliers from market exchange. It is not same as profit. The sum of the consumer surplus and the producer surplus is the total wealth created by a market. 1. Calculate the consumer surplus created by a single trade and by a market. A consumer’s net gain of wealth in a trade (consumer surplus) = maximum amount willing to pay – purchase price 2. Calculate the producer surplus created by a single trade and by a market A producer’s net gain of wealth in a trade for a single good = purchase price – minimum willingness to accept. This is the same as “equilibrium price minus marginal cost.” 3. Calculate the total wealth created by a single trade and by a market Total wealth created by a market = consumer surplus + producer surplus 4. Understand why a buyer decides to enter the market (or not). People trying to maximize their utility but if the price exceeds their willingness to buy than they will exit the market. Remember, the maximum willingness to pay is the marginal utility obtained from consuming the good. A rational person will not pay more than the value he gets from the good.) Because we assume the law of one price, all consumers pay the same price, which happens to be the equilibrium price, P*. 5. Understand why a seller decides to enter the market (or not). Firms trying to maximize their profits, which increases what they can pay their owners, who can then convert these profits into utility-bearing goods to help maximize owner utility but if the price the price received will be less than the marginal cost than it makes no sense for a seller to stay in the market.
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