ECON 1 Lecture Notes - Lecture 9: Laissez-Faire, Economic Surplus, Demand Curve

58 views2 pages

rosewoodchuck40

3 Jun 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

5/3/18

Chapter 7: Consumers, Producers, and the Efficiency of Markets

- Allocation of resources refers to:

o How much of each good is produced

o Which producers produce it

o Which consumers consume it

- Welfare economics: studies how the allocation of resources affects economic well-being

- Willingness to pay: the maximum amount a buyer is willing to pay for that good

o Measures how much the buyer values the good

o Ex: If the price of an iPod is $200, the only buyers who will buy the iPod are those who have a

higher WTP than the market price of the iPod ($200)

▪ QD is the amount of those willing to buy the product

o You can create a demand curve by finding out the QD for each price (P) and then graphing it

▪ The less buyers there are, the more the D curve will look like a staircase

▪ The more buyers there are, the smaller the steps are → make it a smooth curve

▪ At any Q, the height of the demand curve is the WTP of the marginal buyers

• Marginal buyer: buyer who would leave the market if P were any higher

- Consumer surplus: the amount a buyer is willing to minus the amount the buyer actually pays

o CS = WTP – P

o Oly get to ejoy osuer surplus if you’re illig to pay aoe the arket prie alue

o In the demand curve, the total CS equals the area under the demand curve above the price,

from 0 to Q

o Higher price reduces CS:

▪ Fall in CS due to buyers leaving the market

▪ Fall in CS due to remaining buyers paying higher P

- Cost: the value of everything a seller must give up to produce a good (opportunity cost)

o Includes cost of all resources used to produe a good, iludig the alue of the seller’s tie

o A seller will produce and sell the good/service only if the price exceeds his/her cost

o Cost is a measure of willingness to sell

o At each Q, the height of the S cruve is the cost of the marginal seller

▪ Marginal seller: the seller who would leave the market if the price were any lower

- Producer surplus: the aout a seller is paid for a good ius the seller’s ost

o PS = P – cost

o Total PS equals the area above the supply curve under the price, from 0 to Q

o Lower price reduces PS:

▪ Fall in PS due to sellers leaving market

▪ Fall in PS due to remaining sellers getting lower P

- Total surplus = CS + PS

o = total gains from trade in a market

o = (value to buyers) – (cost to sellers)

- Efficiency

o Total surplus = (value to buyers) – (cost to sellers)

o An allocation of resources is efficient if it maximizes total surplus, meaning:

▪ The goods are consumed by the buyers who value them most highly

▪ The goods are produced by the producers with the lowest costs

▪ Raising/lowering the quantity of a good would not increase total surplus

- Evaluating the market equilibrium

o The buyers who value the good most highly are the ones who consume it

o The sellers with the lowest cost produce the good

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Chapter 7: consumers, producers, and the efficiency of markets. Allocation of resources refers to: how much of each good is produced, which producers produce it, which consumers consume it. Welfare economics: studies how the allocation of resources affects economic well-being. Consumer surplus: the amount a buyer is willing to minus the amount the buyer actually pays: cs = wtp p, o(cid:374)ly get to e(cid:374)joy (cid:272)o(cid:374)su(cid:373)er surplus if you"re (cid:449)illi(cid:374)g to pay a(cid:271)o(cid:448)e the (cid:373)arket pri(cid:272)e (cid:448)alue. Cost: the value of everything a seller must give up to produce a good (opportunity cost) Total surplus = cs + ps: = total gains from trade in a market, = (value to buyers) (cost to sellers) Evaluating the market equilibrium: the buyers who value the good most highly are the ones who consume it, the sellers with the lowest cost produce the good.

Related Questions

Demand curve:

The demand curve is the graph depicting the relationship between the price of a certain commodity and the amount of it that consumers are willing and able to purchase at any given price. It is a graphic representation of a market demand schedule. The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together, assuming independent decision-making. Demand curves are used to estimate behaviors in a competitive market and are often combined with supply curves to estimates the equilibrium price. Demand curves are usually considered as theoretical structures that are expected to exist in the real world, but real-world measurements of actual demand curves are difficult and rare.

The demand curve will move downward from the left to the right, which expresses the law of demand.

If the price of corn rises, consumers will have an incentive to buy less corn and substitute other foods, so the total quantity of corn consumers’ demand will fall. The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand. If a factor besides price or quantity changes, a new demand curve needs to be drawn. For example, say that the population of an area explodes, increasing the number of mouths to feed. In this scenario, more corn will be demanded even if the price remains the same, meaning that the curve itself shifts to the right.

According to my view, the demand curve for the Apple Video iPod will increase. According to the given paragraph iPod is thinner and lighter. The hardware and software ecosystem offers good content options and also portable. These are the main qualities expected by the customers. Henceforth customer wants to buy this product in the future also. If the price of the product increases in the future the demand for the product also increases because customers demand more products thinking of price increase in the future. At the same time if the price decreases in this case also customers will buy the product because they think that the good product is coming at a reasonable price. The demand curve for Apple Video iPod in the future may be like follows.

What is your opinion on a competitor product which has similar features to that of an i-pad or say it is better than i-pad and is offered at a comparatively cheaper price, how this will affect the i-pad demand curve and why?

bronzemule740

1)The law of demand states that as the price of a good rise, _____.

A. buyers purchase more of the good because the price of a substitute has risen.

B. buyers purchase less of the good because their real income decreases with an increase in price.

C. buyers purchase more of the good because they expect prices to be even higher in the future

D. buyers purchase less of the good because they expect prices to fall in the future.

2) A movement along a demand curve can be attributed to a change in:

A. the quantity demanded of a good.

B. the demand for a good.

C. the substitution effect of consuming a good.

D. the opportunity cost of producing a good.

3) If we say that demand for a good has increased, we mean that there has been:

A. a leftward shift of the demand curve.

B. a rightward shift of the demand curve.

C. a leftward movement along the demand curve.

D. a rightward movement along the demand curve.

4) Which of the following will cause the demand curve for a normal good to shift to the right?

A. An increase in the price of a complementary good.

B. A decrease in income.

C. A decrease in the price of the good.

D. An increase in the price of a substitute good.

5)Which of the following best defines supply?

A. The amount of a good that is produced at the least possible cost, other things constant

B. The amount of a good that producers are willing and able to sell at each possible price, other things constant.

C. The amount of a good that consumers want to buy at different income levels

D. The amount of a good that producers want to sell at a fixed price

6)The market supply curve of a particular product indicates the total quantities:

A. that are actually sold during a given time period.

B. that sellers are willing to offer for sale at a fixed price.

C. that buyers are willing to purchase at alternative prices.

D. that sellers are willing and able to offer at alternative prices.

7)When quantity demanded of a good exceeds the quantity supplied at the prevailing market price, _____.

A. the demand curve shifts rightward until the surplus is eliminated

B. the market is in equilibrium.

C. the price of the good will tend to increase.

D. the price of the good will decrease

8)A shortage of textbooks is most likely to cause:

A. an increase in the price of textbooks.

B. a decrease in the supply of textbooks.

C. a decrease in the price of paper.

D. an increase in the cost of printing.

9)The most important characteristic of the equilibrium price is that it:

A. maximizes the quantity demanded.

B. clears the market, leaving neither a surplus nor a shortage.

C. minimizes the quantity demanded.

D. guarantees that producers earn the profit.

10)If both demand and supply increases in a market that is initially in equilibrium, the price will:

A. increase only if demand increases more than supply.

B. increase only if supply increases more than demand.

C. remain unchanged while quantity will increase.

D. remain unchanged while quantity will decrease.

lavendertrout13

17. Which of the following is a determinant of supply?

A. Tastes and preferences

B. Price of a complementary good

C. Consumer income

D. Technology

18. A market is in equilibrium:

A. provided there is no surplus of the product

B. at all prices above that shown by the intersection of the supply and demand curves

C. if the amount producers want to sell is equal to the amount consumers want to buy

D. whenever the demand curve is downsloping and the supply curve is upsloping.

19. If the market price is above the equilibrium price:

A. A shortage will occur and producers will produce more and lower prices

B. A surplus will occur and producers will produce less and lower prices

C. A surplus will result and consumers will bid prices up

D. Producers will make extremely high profits

20. The market system automatically corrects a surplus condition in a competitive market by:

A. Raising the price of the commodity in question while increasing the quantity demanded

B. Raising the price of the commodity in question while decreasing the quantity demanded

C. Reducing the price of the commodity in question while increasing the quantity demanded

D. Reducing the price of the commodity in question while decreasing the quantity demanded

21. The price elasticity of demand measures:

A. buyer responsiveness to price changes.

B. the extent to which demand curve shifts as incomes change.

C. the slope of the demand curve.

D. how far business executives can stretch their fixed costs

22. The elasticity of demand for a product is likely to be greater:

A. if the product is a necessity, rather than a luxury good.

B. the greater the amount of time over which buyers adjust to a price change

C. the smaller the proportion of one's income spent on the product.

D. the smaller the number of substitute products available.

23. Market failure is said to occur whenever:

A. private markets do not allocate resources in the most economically desirable way

B. prices rise

C. some consumers who want a good do not obtain it because the price is higher than they are willing to pay

D. government intervenes in the functioning of private markets.

24. A negative externality or spillover cost occurs when:

A. firms fail to achieve allocative efficiency.

B. firms fail to achieve productive efficiency.

C. the price of the good exceeds the marginal cost of producing it.

D. the total cost of producing a good exceeds the costs borne by the producer

violethare146

ECON 1 Lecture Notes - Lecture 9: Laissez-Faire, Economic Surplus, Demand Curve

Document Summary

Get access

Related Documents

ECON 1 Lecture 8: Day 8: Consumers, Producers, and the Efficiency of Markets (Chapter 7)

ECON 1 Lecture Notes - Lecture 10: Economic Surplus, Laissez-Faire, Economic Equilibrium

ECON 1 Lecture Notes - Lecture 4: Economic Surplus, Economic Equilibrium, Demand Curve

Related Questions