Lesson 17 Flashcards
How does consumer surplus + producer surplus look like on a graph?
Look in your book
As price increases, consumer surplus …
falls
On the producer surplus graph in your book, what is P*?
the value to firms of the last unit sold
What happens if price falls below P* on your producer surplus graph in your book?
The last unit would not have been supplied
as firms wouldn’t have found it profittable
Consumer surplus + producer surplus =
total surplus
Total surplus =
net welfare gains
Total surplus is also called
total welfare
Efficient resource allocation is achieved when … (think welfare)
total welfare gains are maximised
Marginal cost
the cost of producing an additional unit
Marginal utility
measured in utils
the amount of satisfaction gained from consuming an extra unit of a good or service
generally, the level of marginal utility declines as additional units of a product are consumed
this is called the law of diminishing returns
Profits of making each additional unit tends to …
decrease due to the law of diminishing returns
Diminishing returns
As more is invested, less is gained
