Chapter 4 (Efficiency of markets)

Question 1

Subjective well-being=?

Answer 1

Subjective well-being: way in which people evaluate their own happiness

Question 2

Consumer Surplus (CS) = ?

Answer 2

Consumer Surplus (CS) = WtP – amount the buyers actually pays (area below the DC & above the price)

Price decrease (increase) => increase (decrease) of CS

Question 3

Producer Surplus (PS) = ?

Answer 3

Producer Surplus (PS) = WtS – the seller’s cost (area below the price & above the SC)

Price increase (decrease) => decrease (increase) of PS

Question 4

Objective well-being=?

Answer 4

Objective well-being: the quality of life

Question 5

Total Surplus (TS) = ? + ? = ?-?

Answer 5

Total Surplus (TS) = CS + PS = Value to buyers – Cost to producers

Question 6

Pareto improvement

Answer 6

Pareto improvement is an improvement (reallocation of resources) that makes one person better off without making someone else worse off

A Pareto efficiency occurs when no more Pareto improvement can be made. The market equilibrium is Pareto
efficient.

Question 7

invisible hand

Answer 7

1) Market equilibrium (ME) efficiently allocates goods and
services to buyers and sellers
2) Market prices encourage buyers and sellers to maximise their own benefits, promoting the society’s well-being as a whole
3) Prices adjust until QD = QS, and force entrepreneurs to allocate the production of goods efficiently

Question 8

Gross Domestic Product GDP