Textbook Guide Economics: Economic Surplus, Demand Curve

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1 Dec 2016
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Consumers, Producers, and the Efficiency of Markets
Welfare economics is the study of how the allocation of resources affects
economic well-being equilibrium of a market maximizes the benefits
received by parties in a market.
Consumer Surplus
o A buyer’s maximum price for a good or service is called his
willingness to pay.
o The difference between a buyer’s willingness to pay and the amount
the buyer actually pays for it is called the consumer surplus.
Consumer surpluses measure the benefit buyers receive from
participating in a specific market.
The buyer who would abandon a market first if the price
increased any higher is called the marginal buyer.
In a graph, the total consumer surplus of all buyers in a market
for a good or service is the total area below the demand curve
and above the price.
In a market for albums:
Producer Surplus
o The measure of willingness to sell is called cost the value of
whatever a seller must give up to produce a good.
o The difference between the amount a seller is paid for a good and
the cost to produce that good is called the producer surplus.
Producer surpluses measure the benefit sellers receive from
participating in a specific market.
The seller who would abandon a market first if the price
decreased any lower is called the marginal seller.
In a graph, the total producer surplus of all sellers in a market
for a good or service is the total area below the price and
above the supply curve.
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In a market for house paintings:
Market Efficiency
o Total surplus can be used to measure the overall well-being of an
economy, computed as the sum of consumer surplus and producer
surplus.
o Efficiency is the property of society that allows it to achieve
maximum benefit from the scarcity of resources in a market,
efficiency is measured by the allocation of resources to maximize
the total surplus received by all individuals of an economy.
o Equality is the property of society that distributes economic
prosperity equally among society in a market, equality is
measured by whether the economic well-being of buyers and sellers
is similar.
o In a graph, total surplus is visually represented by the area between
the supply and demand curves up to equilibrium quantity:
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