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Principles Of Economics Mankiw > Chapter 7 (25-26th July 2016)

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message 1: by Sang (new)

Sang | 58 comments Mod
Study notes and discussion for chapter 7.


message 2: by [deleted user] (new)

Chapter 7 Consumers,Producers,and the Efficiency of Markets

7.1

• welfare economics:the study of how the allocation of resources affects economic well-being

• willingness to pay: the maximum amount that a buyer will pay for a good

• consumer surplus = willingness to pay (value to buyers) - the amount the buyer actually pays for it

• producer surplus = the amount a seller is paid for a good - the seller's cost of providing it

• total surplus = consumer surplus + producer surplus
= value to buyers - cost to sellers


7.2

The forces of supply and demand allocate resources efficiently. That is, even though each buyer and seller in a market is concerned only about her own welfare, together they are led by an invisible hand to an equilibrium that maximizes the total benefits to buyers and sellers:

1. Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay.

2. Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost.

3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.

7.3

• two market failures: market power and externalities

When markets fail, public policy can potentially remedy the problem and increase economic efficiency. Microeconomists devote much effort to studying when market failure is likely and what sorts of policies are best at correcting market failures.


message 3: by Karen (new)

Karen | 27 comments Consumer Surplus
Willingness to Pay, the maximum amount that a buyer will pay for a good.
Consumer Surplus, the amount the buyer is willing to pay for a good minus the amount the consumer actually pays for it. Consumer surplus is the area above the price and below the demand curve.
What Does Consumer Surplus Measure?
Consumer surplus measures the economic well-being for consumer.
In most markets, consumer surplus does reflect the economic well-being

Producer Surplus
Cost and the Willingness to Sell
Cost, the value of everything a seller must give up to produce a good.
Producer Surplus is the amount a seller is paid for minus the seller’s cost of providing it.
Producer surplus measures the economic well-being for sellers.

Market Efficiency
The Benevolent Social Planner
Total Surplus=Value to Buyers – Cost to Sellers
Efficiency, the property of a resource of allocation of maximizing the total surplus received by all members of society.
Equality, the property of distributing economic prosperity uniformly among all members of society.
Evaluating the Market Equilibrium
1) Free markets allocate the supply of good to the buyers who value them most highly, as measured by their willingness to pay.
2) Free markets allocate the demand of good to the sellers who can produce them at the lowest cost.
3) Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
Market Efficiency and Market Failure
Market power, which means a single buyer or seller may be able to control market price, may cause market inefficiency.
Externality
Market Failure, the inability of some unregulated markets to allocate resources efficiently.
When markets fail, public policy can potentially remedy problem and increase economic efficiency.


message 4: by Sang (new)

Sang | 58 comments Mod
Chapter 7 Consumers, Producers and the Efficiency Of Markets

Welfare economics: the study of how the allocation of resources affects economic well-being.

Consumer Surplus
Willingness to pay: the maximum amount that a buyer will pay for a good.
Consumer surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
The area below the demand curve and above the price measures the consumer surplus in a market.


Producer Surplus:
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
The area below the price and above the supply curve measures the producer surplus in a market.

Market Efficiency:

Consumer surplus = Value to buyers - Amount paid by buyers
Producer surplus = Amount received by sellers - Cost to sellers

Total Surplus = Value to buyers - Cost to sellers

Efficiency: the property of a resource allocation of maximizing the total surplus received by all members of society

If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency. If an allocation is not efficient, then some of the potential gains from trade among buyers and sellers are not being realized.

Equality: the property of distributing economic prosperity uniformly among the memebers of society

Some Observations:

Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay.
Free markets allocate the demand for goods to the sellers who can produce them a the lowest cost.
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.


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