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Chapter 7

Chapter 7 Economics.docx

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Department
Economics
Course
Economics 10a
Professor
Gregory Mankiw
Semester
Fall

Description
Chapter 7 Economics: Consumers, Producers, and the Efficiency of Markets • Welfare economics: the study of how the allocation of resources affects economic well-being • The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers • Willingness to pay: the maximum amount that a buyer will pay for a good o It measures how much a buyer values the good o Each buyer would be eager to buy the product at a price less than his willingness to pay and he would refuse to buy the product at a price greater than his willingness to pay o He is indifferent to buying the good at the willingness to pay • Consumer surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for a good; the benefit a buyer receives from participating in the market o Closely related to demand curvequantity demanded o The price given by the demand curve reflects the buyer’s willingness to pay of the marginal buyer (who would leave the market first if the price was higher) o Consumer surplus in the market is denoted graphically as the area above the price and below the demand curve  C.S.=the willingness to pay - the market price o Consumer surplus measures the benefit buyers receive from a good as buyers themselves perceive it o In most markets, consumer surplus does reflect economic well-being • Cost: the value of everything a seller must give up to produce a good • Producer surplus: the amount a seller is paid for a good minus the seller’s cost of providing it o Closely related to the supply curvequantity supplied o The benefit sellers receive from participating in the market o Each producer would be eager to sell his service at a price greater than his cost, would refuse to sell his services at a price less than his cost, and is indifferent about selling his services at a price exactly equal to his cost o 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 o The area below the price and above the supply curve measures the producer surplus in a market  The height of a supply curve measures sellers’costs, and the difference between the price and the cost of production is each seller’s producer surplus • Total surplus=consumer surplus + producer surplus • Consumer surplus=value to buyers – amount paid by buyers; the area above the price and under the demand curve • Producer surplus=amount received by sellers – cost to sellers; the area below the price and above the demand curve • Total surplus=value to buyers – cost to sellers • Buyers who value the good more than the price (AE on the above demand curve) choose to buy the good, whereas buyers who value th
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