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Chapter 7

Chapter 7 EC120.docx

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Department
Economics
Course
EC120
Professor
Peter Sinclair
Semester
Fall

Description
EC120 Chapter 7-Consumers, Producers, and the Efficiency of Markets Week 5 -Welfare Economics-the study of how the allocation of resources affect economic well-being -The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers Consumer Surplus -We look at the benefits buyers receive from participating in a market Willingness to Pay -Each person has a limit to the amount that they are willing to pay for it -Willingness to pay-maximum amount that a buyer will pay for a good -Each buyer would be eager to buy the album at a price less than his willingness to pay, would refuse to buy the album at a price more than his willingness to pay and would be indifferent about buying the album at a price exactly equal to his willingness to pay. -Consumer Surplus-a buyer’s willingness to pay minus the amount the buyer actually pays Using the Demand Curve to Measure Consumer Surplus -The following graph shows the demand curve that corresponds to the previous demand schedule -At any quantity the price given by the demand curve and the buyers’ willingness to pay of the marginal buyer - the buyer who would leave the market first if the price was any higher. -It can also be used to measure consumer surplus -The area below the demand curve and above the price measures the consumer surplus in a market – for any demand curve. -The total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or service EC120 Chapter 7-Consumers, Producers, and the Efficiency of Markets Week 5 How a Lower Price Raises Consumer Surplus -Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good better off What Does Consumer Surplus Measure? -The goal in developing the concept of consumer surplus is to make normative judgements about the desirability of market outcomes -Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves perceive it -It is a good measure of economic well being if policymakers want to respect the preferences of buyers -From the standpoint of society, willingness to pay in this instance is not a good measure of teh buyer’s benefit, and consumer surplus is not a good measure of economic well-being, because addicts are not looking after their own best interests Producer Surplus -We consider the benefits sellers receive from participating in a market Cost and the Willingness to Sell -Each painter is willing to take the job if the price she they would receive exceeds her cost of doing the EC120 Chapter 7-Consumers, Producers, and the Efficiency of Markets Week 5 work -Here the term cost should be interpreted as the painter’s opportunity cost. -Each painted would be eager to sell their services at a price greater than their cost, and would refuse to sell their services at a price less than their cost. At a price equal to her cost, they would be indifferent about selling their services: they would be equally happy getting the job or walking away without incurring the cost -The price will start h
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