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Chapter 4

ECON 102 Chapter 4 Notes

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ECON 102

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ECON 102 Chapter 4 Notes Markets and Government 1. Consumer Surplus and Producer Surplus a. Consumer Surplus­ the difference between market price and what  consumers (as individuals) would be willing to pay. It is equal to the area  above the price and below the demand curve. i. Goal of the consumer is to find a product at no greater than their  willingness to pay 1. (Willingness to pay – price)  (WTP­ P) b. Producer Surplus­ the difference between market price and the price at  which firms are wiling to supply the product. It is equal to the area below  the market price and above the supply curve i. (Price­ price that seller is willing to sell)  (p­ WTS) c. Measurement of producer and consumer surplus remain the same when  prices are fixed like at a grocery store 2. Using Consumer and Producer Surplus: The Gains from trade a. Total Surplus­ The sum of consumer and producer surpluses, and a  measure of the overall net benefit gained from trade i. Increases or decreases based on quantity ii. Maximized at the equilibrium point b. When Price Exceeds Equilibrium­  i. Leads to excess supply ii. Consumer surplus falls 1. Price at 400 instead of 300 forces some people to not buy  the product 2. Consumers willing to pay up to 400 are paying 100 more  than they would have at 300 iii. Producers may or may not benefit from higher price because of  two opposing effects 1. Higher price causes some consumers to not make the  purchase at all causing a loss in producer surplus 2. Offset by the additional money earned by selling fewer  units at a higher price  iv. Total surplus falls c. When Price Fall Below Equilibrium i. Shortage ii. producer surplus will decrease 1. some
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