ECON 201 Chapter Notes - Chapter 7: Economic Surplus, Demand Curve, Economic Equilibrium

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8 Feb 2017
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
7.1 Consumer Surplus
Willingness to Pay
willingness to pay: the maximum amount that a buyer will pay for a good
Measures how much buyer values the good
Consumer surplus: the amount a buyer is willing to pay for a good minus the amount the
buyer actually pays for it
Consumer surplus measures the benefit buyers receive from participating in a
market.
Using the Demand Curve to Measure Consumer Surplus
At any quantity, the price given by the demand curve shows the willingness to pay of the
marginal buyer, the buyer who would leave the market first if the price were any higher.
The area below the demand curve and above the price measures the consumer surplus
in a market
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?
Consumer surplus, the amount that buyers are willing to pay for a good minus the
amount they actually pay for it, measures the benefit that buyers receive from a good as
the buyers themselves perceive it
consumer surplus is a good measure of economic well-being if policymakers
want to satisfy the preferences of buyers
In some circumstances, policymakers might choose to disregard consumer surplus
because they do not respect the preferences that drive buyer behavior.
In most markets, however, consumer surplus does reflect economic well-being
Economists normally assume that buyers are rational when they make decisions and
that people’s preferences should be respected
7.2 Producer Surplus
Cost and the Willingness to Sell
Cost: the value of everything a seller must give up to produce a good
Producer surplus: amount a seller is paid for a good minus the seller’s cost of providing it
Using the Supply Curve to Measure Producer Surplus
Just as consumer surplus is closely related to the demand curve, producer surplus is
closely related to the supply curve
At any quantity, the price given by the supply curve shows the cost of the marginal
seller, the seller who would leave the market first if the price were any lower
Note that the height of the supply curve is related to the sellers’ costs
Because the supply curve reflects sellers’ costs, we can use it to measure producer
surplus
The area below the price and above the supply curve measures the producer surplus in
a market
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