8) CH7 Consumers, Producers & the Efficiency of Markets

Question 1

What are welfare economics?

Answer 1

Study of how the allocation of resources affects the economic well-being.

Question 2

What is the well-being?

Answer 2

Happiness or satisfaction with life as reported by individuals. It is subjective.

Question 3

What is the allocative efficiency?

Answer 3

Resource allocation where the value of the output by sellers matches the value placed on the output by the buyers.

Question 4

What does represent the equilibrium in the welfare economics?

Answer 4

Maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product.

Question 5

What is willingness to pay?

Answer 5

Maximum amount that a buyer will pay for a good.

It measures how much the buyer values the good or service.

Question 6

What is the consumer surplus?

Answer 6

Buyer’s willingness to pay - amount really paid for the good.

It measures the benefit of participating in the market.

Question 7

Wha ts is a marginal buyer?

Answer 7

Buyer who would leave the market if the price were any higher.

Question 8

What does indicate the demand curve?

Answer 8

It indicates the willingness to pay for the marginal buyer.

Question 9

Where is the consumer surplus on the demand curve graph?

Answer 9

The area below the demand curve and above the price.

Question 10

What is the willingness to sell?

Answer 10

The value of everything a seller must give up to produce a good. It is the lowest price to accept a job.

Question 11

What is the producer surplus?

Answer 11

Amount a seller is paid - seller’s cost

It is the benefit to seller’s participating in the market.

Question 12

What is the producer surplus on the supply curve graph?

Answer 12

Area below the price and above the supply curve.

Question 13

Who is the benevolent social planner?

Answer 13

Omniscient, omnipotent & benign dictator who wants to maximize the economic well-being.

Question 14

Whatare the 2 ways of seeing the total surplus?

Answer 14

Consumer surplus + producer surplus

OR

value to buyers - cost to sellers.

Question 15

What is the efficiency?

Answer 15

Property of a resource allocation of maximizing the total surplus received by all members of a society.

Question 16

What is inefficiency?

Answer 16

When a good is not produced by the seller with the lowest cost or not consumed by the buyers with the highest valuation.

Question 17

In addition to market efficiency, about what must care the social planner?

Define it.

Answer 17

It must care about equity.

Fairness of the distribution of well-being among the various buyers and sellers.

Question 18

What are the 3 insights concerning market outcomes?

Answer 18

• Free markets allocate the supply of goods to the buyers who value them most highly, as measured by the willingness to pay.
• Free markets allocate the D for goods to the sellers who can produce them at least cost.
• Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.

Question 19

What are the best way to organize economic activities?

Answer 19

Free market / laissez faire.

The equilibrium maximizes the total surplus.

Question 20

What is market power and when does it occur?

Answer 20

Ability to influence prices. It keeps prices and quantity from the equilibrium, so market may become inefficient.

When a market system is not perfectly competitive, it can happen.

Question 21

What are externalities?

What is the effect, if they are not taken into account?

Answer 21

Outcomes that affect individuals other than buyers and sellers in the market.

If buyers and sellers don’t take it into account when deciding how much to produce and the buy, the equilibrium can be inefficient.

Question 22

How could we see efficiency in a Smithian way?

Answer 22

The invisible hand leads buyers and sellers to efficiency.