Chapter 7 Economics Chapters 7 8 10 11 Willingness to pay the amount that a buyer will pay for a good o At a price to his willingness to pay the buyer would be indifferent about buying the good o If the price is exactly the same as the value he places on the album he would be equally happy buying it or keeping his money Customer surplus the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it o Measures the benefit that buyers receive from a good as the buyers themselves perceive it o AMOUNT WILLING TO PAY AMOUNT ACTUALLY PAID o He is willing to pay 100 for the album but pays only 80 for it receiving a customer surplus of 20 o Amount under the line Marginal buyer the buyer who would leave the market first if the price were any higher o At any quantity the price given by the demand curve shows the willingness to pay of the marginal buyer Producer surplus the amount a seller is paid for a good minus the seller s cost of providing it o Amount above the line Consumer surplus value to buyers amount paid by buyers Producer surplus amount received by sellers cost to sellers Total surplus value to buyers amount paid by buyers amount received by sellers cost to sellers Efficiency the property of a resource allocation of maximizing the total surplus received by all members of society Equality the property of distributing economic prosperity uniformly among the members of society Observations leading to two insights about market outcomes o 1 Free markets allocate the supply of goods to the buyers who value them most highly as measured by their willingness to pay o 2 Free markets allocate the demand for goods to the sellers who can produce them at a lower cost o 3 Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus Market power ability to influence prices Externalities cause welfare in a market to depend on more than just the value of the buyers and the cost of the sellers Market failure the inability of some unregulated markets to allocate resources efficiently Chapter 8 Both buyers and sellers are worse off when a good is taxed A tax raises the price buyer s pay and lowers the price sellers received When a tax is levied on buyers the demand curve shifts downward by the size of the tax when it is levied on sellers the supply curve shifts upward by that amount The benefit received by buyers in a market is measured by consumer surplus The benefit received by sellers in a market is measured by producer surplus If T is the size of the tax and Q is the quantity of the good sold then the government gets total tax revenue of T x Q Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade When supply is relatively inelastic the deadweight loss of a tax is small When supply is relatively elastic the deadweight loss of a tax is large When demand is relatively inelastic the deadweight loss of a tax is small When demand is relatively elastic the deadweight loss of a tax is large
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