Consumers, producers, and efficiency of markets Flashcards
(15 cards)
What does the allocation of resources refer to?
It refers to how much of each good is produced, which producers produce it, and which consumers consume it.
What is welfare economics?
The study of how the allocation of resources affects economic well-being.
How is consumer surplus defined?
Consumer surplus is the buyer’s willingness to pay for a good minus the amount they actually pay for it, measuring the benefit to buyers from participating in a market.
What does a demand curve represent in relation to consumer surplus?
The area below the demand curve and above the market price measures consumer surplus in the market.
How does an increase in price affect consumer surplus?
It can lead to additional consumer surplus for existing consumers and new consumer surplus for new buyers at lower prices.
Define producer surplus.
Producer surplus is the amount a seller receives for a good minus their cost, measuring the benefit to sellers from participating in a market.
What does a supply curve indicate regarding producer surplus?
The area below the price and above the supply curve measures producer surplus in the market.
How does an increase in price affect producer surplus?
Similar to consumer surplus, it results in additional producer surplus for existing producers and new producer surplus for new sellers entering at higher prices.
What is total surplus?
Total Surplus = Consumer Surplus + Producer Surplus; it represents the overall benefit to society from production and consumption activities.
What is meant by efficiency in resource allocation?
Efficiency means maximizing total surplus received by all members of society through optimal resource allocation.
How do equity and efficiency differ?
Efficiency focuses on maximizing output (the size of “the cake”), while equity concerns how that output is distributed fairly among society members.
What are three insights about free market outcomes?
They allocate goods to buyers who value them most highly.
They allocate demand to sellers who can produce at least cost.
They produce quantities that maximize total surplus.
Why is equilibrium quantity considered efficient?
At quantities less or greater than equilibrium quantity, total surplus is not maximized; thus, equilibrium quantity achieves efficiency.
What assumptions must hold true for markets to be considered efficient?
Markets are perfectly competitive.
Market outcomes only matter to participants (buyers/sellers) without external effects (externalities).
What are examples of market failure?
Market power (control over prices) and externalities (effects on non-participants), leading unregulated markets to allocate resources inefficiently.
