Chapter 7: Market Efficiency Flashcards
(29 cards)
The maximum price that each buyer is willing to pay for a good
Willingness to pay
At a price higher than the willingness to pay, a buyer will ____ buy a good
not
At a price equal to the willingness to pay, the buyer would be ____ about buying a good
indifferent; equally happy buying or keeping their money
What is consumer surplus?
The buyer’s willingness to pay minus the amount the buyer actually pays.
What is the marginal buyer?
The buyer who would leave the market first if the price was any higher
A demand curve for a small number of buyers looks like
A staircase
At any quantity, the price given by the demand curve shows the willingness to pay of the___
marginal buyer
What is the consumer surplus?
The area below the demand curve and above the price.
The height of the demand curve. measures the _____ buyers place on _____
value; the good
How do you calculate consumer surplus?
((Price-Willingness to pay) X Quantity/))2
The increase in consumer surplus is composed of 2 parts:
1) The buyers who were already buying the good at the initial quantity and higher price, who are better off by paying less
2) New buyers enter the market because they are willing to buy the good at the lower price
Consumer measures the benefit that buyers receive from a good as the ______ perceive it
buyers perceive it
When might a policymaker disregard consumer surplus?
When the preferences that drive consumer behaviour are detrimental: EX drug purchases
Why do economists generally respect the preferences involved in consumer surplus?
Because they assume buyers are rational people who are the best judge of how to achieve their goals
What is a cost?
The value of everything a seller must give up in order to produce a good.
What does a seller’s cost represent?
The opportunity cost; the measure of the willingness to sell their services.
At any quantity, the price given by the supply curve shows the costs of the _____ _____
Marginal seller
What is the marginal seller?
The seller who would leave the market first if the price was any lower.
What is the marginal cost curve?
Represents the cost of the marginal seller at each quantity
What is the producer surplus?
Difference between seller’s cost and price
What area is the producer surplus?
Area below the price and above the supply curve
What is the benevolent social planner?
An all-knowing, all-powerful. well-intentioned dictator; but only a hypothetical one.
What is the total surplus?
The sum of consumer and producer surplus
How do you calculate total surplus?
Value to buyers - cost to sellers
(Value to buyers - amount paid by buyers) + (Amount received by sellers - Cost)
