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ECON 101 NOTES: Markets and Welfare & Taxes

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University of Alberta
Alexander Gainer

SUPPLY AND DEMAND MARKETS AND WELFARE - Welfare – the well-being of buyers and sellers - Allocation – who produces and who consumes and the amount of good produced - Welfare economics – how the allocation of resources influence people’s well-being - Willingness to pay – the max amount a person will pay for a good - The graph of a demand curve looks like steps, but if more people are added into the curve then it would look smoother - The buyers on the curve is referred to the marginal buyer P - Marginal buyer – someone who would leave the market if the price was any higher - Consumer Surplus – willingness to pay – price the consumer actually pays - When analyzing the demand curve the consumer surplus is the area measured from the willingness to pay for a consumer to the price they actually pay, and consumer surplus will add up for the whole market - The number of steps show the amount of buyers in a curve Q - When the price raises from the original, the loss amount is the amount people less that will be buying - The green triangle in the graph on the side shows the fall in consumer surplus (A= 0.5bh) When thinking about the cost of a product, it is the value of everything a seller must give up to produce a good (opportunity cost + explicit costs) - A seller will only sell their product if the price offered exceeds the seller’s costs - Like a buyer’s willingness to pay, a seller has a willingness to sell - Instead of going downward as quantity increases, a seller’s curve goes diagonally upwards as quantity increase - Can also be steps (in the real world there is a lot of people so it is a smoother curve) If it was steps than the graph will look like steps upwards - Producer Surplus – Price – Seller’s willingness to pay - Adds up on the graph like consumer surplus does - When measuring the producer surplus you measure above the area above the curve, not under the curve - In the curve on the left side the red line marks the market price for a product, and the buy line is the supply curve. Notice there are 3 steps so there are 3 steps in the market. Since the price offer is above the two first steps, that means in this scenario 2 sellers will sell their products, and the purple shade shows the amount of produce surplus in the market. - Total Surplus – consumer surplus + producer surplus - Consumer surplus is the buyer’s gain - Seller’s sur
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