Chapter 7 Consumers Producers and the Efficiency of Markets Welfare economics the study of how the allocation of resources affects economic well being 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 Consumer 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 buyers receives from being in a market Demand curve reflects buyers willingness to pay so we can use it to measure consumer surplus o The area below the demand curve and above the price measures the consumer surplus in a market Marginal buyer the buyer who would leave the market first if the price were any higher A lower price raises consumer surplus Consumer surplus is a good measure of economic well being if the policymakers want to respect the preferences of buyers Producer Surplus willingness to sell Cost the value of everything a seller must give up to produce a good Producer surplus the amount a seller is paid for a good minus the seller s cost of providing it measures the benefit sellers receive from participating in a market Supply curve can measure producer surplus Marginal seller the seller who would leave the market first if the price were any lower The area below the price and above the supply curve measures the producer surplus in a market Higher price raises producer surplus Market Efficiency cost to sellers Total surplus sum of consumer and producer surplus value to buyers minus Efficiency the property of a resource allocation of maximizing the total surplus received by all members of a society Equality the property of distributing economic prosperity uniformly among the members of a society 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 Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost o Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus At quantities less than the equilibrium quantity the value to buyers exceeds At quantities greater than the equilibrium quantity the cost to sellers Therefore the market equilibrium maximizes the sum of producer and the cost to sellers exceeds the value to buyers consumer surplus A market might not be efficient if 1 the market is not perfectly competitive or 2 the market outcomes matter to more than the ppl involved o Market power the ability to influence prices can cause markets to be inefficient b c it keeps the price and quantity away from the equilibrium of supply and demand o Externalities ex pollution pesticides don t only concern the producer and buyer it affects everyone who drinks water o Market failure the inability of some unregulated markets to allocate resources efficiently externalities and market power
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