Chapter 7 Welfare Economics Study of how the allocation of resources affects economic well being Equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers Willingness to Pay Maximum amount buyer will pay At a price equal to his willingness to pay they buyer would be indifferent about buying the good If the price is exactly the same as the value he places on the good he would be equally happy buying it or keeping his money Consumer Surplus Amount buyer is willing to pay MINUS amount actually paid Measures the benefit buyers receive The area below the demand curve and above the price measures the consumer surplus Marginal Buyer The buyer who would leave the market first if the price were any higher Cost Value of everything a seller must give up to produce a good Producer Surplus Amount seller is paid MINUS seller s cost for providing it The area above the supply curve and below the price Marginal Seller The seller who would leave the market first if the price were any lower Total Surplus Value to buyers Amount paid by buyers Amount received by sellers Cost to sellers or Value to buyers Cost to sellers Efficiency Property of a resource allocation of maximizing the total surplus received by all members of society Equality Property of distributing economic prosperity uniformly among members of society Externalities Causes welfare in market to depend on more than just the value to the buyers and the cost to the sellers Market Power A single buyer or seller may be able to control a market price Market Failure The ability of some unregulated markets to allocate resources efficiently 1 Free Markets allocate the supply of goods to the buyers who value them the most highly as measured by their willingness to pay 2 Free markets allocate the demand for goods to the sellers who can produce them 3 Free markets produce the quantity of goods that maximizes the sum of consumer at the lowest cost and producer surplus
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