ECON 2100 Lecture Notes - Lecture 7: Demand Curve, Economic Surplus

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Published on 21 Sep 2016
Chapter 7- Consumers, Producers, and the efficiency of Markets
- Welfare Economics
Welfare Economics studies how the allocation of resources affects economic well-being.
Allocation of resources- refers to
How much of each good is produced
Which producers produce it
Which consumers consume it
- Willingness to Pay
A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good.
WTP measures how much the buyer values the good.
Example: If there are four people and they want to buy an ipod, they will each have their own
WTP. Anthony WTP: $250 Chad: 175 Flea: 300 John: 125. So, if the Ipod is priced at $200, who is
going to end up buying the ipod? Anthony and Flea because there WTP is at or above the price
for the ipod.
If the price of the ipod goes down, then eventually Chad will be able to buy it and then John at
some point.
Graph: a staircase shape with price vs. number of buyers. The more buyers, the smaller the
steps on the graph are.
Marginal buyer- the buyer who would leave the market if price were any higher.
Flea’s WTP is the highest at $300, so if the price were to go any higher; Flea would leave.
Therefore, he would be the last buyer and he is the marginal buyer.
Consumer Surplus- is the amount of a buyer is willing to pay minus the amount the buyer
actually pays: CS= WTP-P
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