Chapter 4

Question 1

Willingness to pay

Answer 1

• maximum price at which he or she would buy that good

Question 2

individual consumer surplus

Answer 2

• the net gain to an individual buyer from the purchase of a good
• equal to the difference between the buyer’s willingness to pay and the price paid

Question 3

total consumer surplus

Answer 3

• the sum of the individual consumer surpluses of all the buyers of a good in a market

Question 4

consumer surplus

Answer 4

• often used to refer to both individual and to total consumer surplus

Question 5

Consumer surplus on a graph

Answer 5

• equal to the area below the demand curve but above that price

Question 6

cost

Answer 6

• the lowest price a seller is willing to sell a good

Question 7

individual producer surplus

Answer 7

• the net gain to an individual seller from selling a good
• equal to the difference between the price received and the seller’s cost

Question 8

total producer surplus

Answer 8

• in a market is the sum of the individual producer surpluses of all the sellers of a good in a market

Question 9

producer surplus

Answer 9

• economists use this term to refer both to individual and to total producer surplus

Question 10

total surplus

Answer 10

• the total net gain to consumers and producers
• sum of producer and consumer surplus

Question 11

3 ways to increase total surplus

Answer 11

1. reallocate consumption amoung consumers
2. reallocate sales among sellers
3. change the quantity traded

Question 12

3 caveats

Answer 12

1. markets arent fair
2. markets sometimes fail
3. even what equilibrium maximizes surplus, does not mean it’s the best for every individual

Question 13

efficiency

Answer 13

• about how to achieve goals, not what those goals should be
• efficiency does not address the best way to achieve a goal once it has been determined

Question 14

interrelated markets

Answer 14

• the economy as a whole is made up of many interrelated markets

Question 15

theoretical result

Answer 15

• it is virtually impossible to find an economy in which every market is efficient

Question 16

effectiveness of two features help markets

Answer 16

1. property rights
2. economic signals

Question 17

property rights

Answer 17

• the rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose

Question 18

economic signal

Answer 18

• any piece of information that helps people make better economic decisions

Question 19

the market for lemons

Answer 19

• a market in which prices dont wory well as economic signals

Question 20

inefficient

Answer 20

• if there are missed opportunities: some people could be made better off without making other people worse off

Question 21

market failure

Answer 21

• occurs when a market failes to be efficient

Question 22

monopolist

Answer 22

• when a market contains only a single seller of a good

Question 23

externalities

Answer 23

• side effects on the welfare of others that markets dont take into account
• ex. pollution

Question 24

private information

Answer 24

• information about a good that some people possess but others don’t

Question 25

planned economies

Answer 25

* economies in which a central planner, rather than markets, makes consumption and production decisions