ECON 001 Lecture Notes - Lecture 7: Economic Surplus

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12 Jun 2018

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Chapter 7

Is Society producing too much, too little, or just the right amount at Q*

Welfare Economics- branch of economics that studies how goods are allocated and whether

or not is optimal from society POV

I. Welfare Economics

A. Consumer Surplus- difference between what consumers are willing to pay and what

they actually have to pay

Willingness to pay- maximum amount a consumer will be willing to pay for a good

(ex) willing to pay $10 for a Big Mac. Suppose Big Mac price is $3. Surplus is $7.

What if willingness to pay for for Big Mac is $2.50, surplus is 0, cannot be negative.

B. Producer Surplus- difference between price the seller actually receives for good and

the cost of production

Assume firms will supply a good as long as the price they receive is greater than the cost of

production

Key Point: supply curve reflects the cost of production at different production levels

C. Total Surplus- consumer surplus + supplier surplus

Key Point: Production is optimal if total surplus is maximized.

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Document Summary

Is society producing too much, too little, or just the right amount at q* Willingness to pay- maximum amount a consumer will be willing to pay for a good (ex) willing to pay for a big mac. What if willingness to pay for for big mac is . 50, surplus is 0, cannot be negative. Producer surplus- difference between price the seller actually receives for good and the cost of production. Assume firms will supply a good as long as the price they receive is greater than the cost of production. Key point: supply curve reflects the cost of production at different production levels. C. total surplus- consumer surplus + supplier surplus.

Related Questions

True or False:

1. Consumer surplus is the buyer's willingness-to-pay minus the seller's opportunity cost of production.

2. If your willingness-to-pay for a hamburger is $3 and you paid $2, then your consumer surplus is $5.00

3. The opportunity cost of production for a seller includes the implicit cost of the seller's time.

4. The height of the supply curve at a selected quantity is the seller's opportunity cost of producing that marginal unit.

5. Total surplus (total well-being) is the seller's cost of production minus the buyer's willingness-to-pay.

6. The competitive market equilibrium outcome is efficient because it allocates the produced output to the buyers who place the highest value on the good

7. Producer surplus is the area above the supply curve and below the price.

8. The competitive market equilibrium outcome maximizes total surplus (total well-being)

9. Producing and consuming more of a good will always increase the total surplus(total well-being).

redelephant805

7) Indicate whether each of the following statements is true or false, and explain why.

A. Producer surplus tends to fall as the supply curve becomes more elastic.

B. Consumer surplus tends to rise as demand becomes more elastic.

C. The market demand curve indicates the minimum price buyers are willing to pay at each level of production.

D. The market supply curve indicates the minimum price required by sellers as a group to bring forth production.

E. Consumer surplus is the amount that consumers are willing to pay for a given good or service above and beyond the amount actually paid.

bronzeoyster264

10. Producer surplus is the A) difference between the maximum price consumers are willing to pay and the minimum price producers are willing to accept. B) difference between producers' revenues and opportunity costs of production. C) opportunity cost of production. D) area under the supply curve. E) total amount paid for the good.

ECON 001 Lecture Notes - Lecture 7: Economic Surplus

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