Econ 20A: Final Study Guide

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University of California - Irvine
Wilima Wadhwa

Economics 20AFinal Study GuideChapter 7Consumers Producers and the Efficiency of MarketsConsumer SurplusoWelfare EconomicsThe study of how the allocation of resources affects economic wellbeingoWillingness to PayThe maximum amount that a buyer will pay for a goodThe demand curve reflects buyers willingness to pay so we can also use it to measure consumer surplusoConsumer SurplusThe amount a buyer is willing to pay for a good minus the amount the buyer actually pays for itConsumer surplus measures the benefit buyers receive from participating in a marketMeasures the benefit the buyers receive from a good as the buyers themselves perceive itoMarginal BuyerThe buyer who would leave the market first if the price were any higheroThe area below the demand curve and above the price measures the consumer surplus in a marketProducer SurplusoCostThe value of everything a seller must give up to produce a goodoProducer SurplusThe amount a seller is paid for a good minus the sellers cost of providing itJust as consumer surplus is closely related to the demand curve producer surplus is closely related to the supply curveoMarginal SellerThe seller who would leave the market first if the price were any loweroThe area below the price and above the supply curve measures the producer surplus in a marketMarket EfficiencyoTotal SurplusThe sum of consumer surplus and producer surplusoEfficiencyThe property of a resource allocation of maximizing the total surplus received by all members of societyoEqualityThe property of distributing economic prosperity uniformly among the members of society1Free markets allocate the supply of goods to the buyers who value them most highly as measured by their willingness to pay2Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost3Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplusoMarket PowerThe ability of a single buyer or seller to have a influence market pricesoExternalitiesEconomic side effects or byproducts that affect an uninvolved third party can be negative or positiveoMarket FailureThe inability of some unregulated markets to allocate resources
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