ECON-2006EG Study Guide - Quiz Guide: Invisible Hand, Pareto Efficiency, Economic Surplus

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Reservation value = (willingness-to-pay values) is the price at which a person is indifferent between making the trade and not doing so. Equilibrium price is intersection of market demand and market supply curves. Social surplus = is the sum of consumer surplus and producer surplus. Social surplus maximized optimization: highest value buyers are making a purchase & lowest cost sellers are selling. Consumer surplus difference between buyer"s reservation values and what the buyer"s actually pay. Producer surplus difference between the price and the seller"s reservation values (marginal cost) An outcome is pareto efficient if no individual can be made better off without making someone worse off. Competitive market equilibrium maximizes social surplus, society interested in maximizing the total size of the economic pie . Self-interested individuals, with no direction are led by invisible hand to maximize total well-being of society. 7. 2 extending the reach of the invisible hand: from.

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