Micro Chapter 4 Exam 1

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  1. Deman Curve and Consumer Surplus
    • a consumer's willingness to pay (WTP) for a good
    • = he maximum price at which he/she would buy that good
  2. Individual consumer surplus (CS)
    the net gain to an individual buyer from te purchase of a good
  3. Total consumer surplus
    • the net gain to an individual buyer from the purchase of a good
    • = difference b/w the buyer's WTP and the price paid
    • Total consumer surplus: the sum of all individual CSs
  4. Consumer Surplus
    the total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price
  5. Supply curve and the Producer Surplus
    a potential seller's COST of producing good
    = the minimum price at which he/she is willing to sell the good
  6. Individual produce surplus: (PS)
    • the net gain to a seller from selling a good
    • = difference b/w the price received and the seller's cost
  7. total producer surplus
    the sum of all individual producer surplus
  8. Producer surplus
    the total producer surplus from sales of a good at a given price is the area above the supply curve but below that price
  9. Total Surplus = sum of TCS and TPS
    Efficiency of markets
    • Gains from trade in the market
    • competitive markets help us to reach maximum possible total surplus at market equilibrium
  10. Is Higher Total Surplus Possible?
    Three ways to test
    • 1. reallocating consumption among consumers
    • Take a g/s from a buyer with WTP higher than P* and give it to a person with WTP lower than P*
    • 2. Realocating sales among sellers
    • Take sales from a seller with costs lower than P* and force
    • a seller with costs higher than P* to sell it
    • 3. Changing the quantiy traded
    • Compel buyers and sellers to trade either more or less than Q*
  11. Market Equilibrium Maximizes Total Surplus
    • It allocates consumption of g/s to the potential buyers with the highest WTP
    • It allocates sales to the potential sellers w/the lowest costs
    • it ensures mutual benefits: WTPbuyer > Cseller
    • if WTPbuyer < C seller, no mutually beneficial trade possible
  12. Key Role Players In Market Mechanism
    Property Rights
    give freedom of disposal of what you own
  13. price or the change in price
    Signals buyers and sellers reservation prices and maket dis-/equilbrium
  14. What Makes Markets Inefficient??
    • Market Failure
    • Externalities
    • Smart for one, dumb for all!!
    • Market Control
    • Price Control
    • Quantiy Control
Card Set:
Micro Chapter 4 Exam 1

consumer and producer surplus/ market equilibrium/total surplus
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