Reading notes--Principles of Economics (chapter7)

Summary

Chapter 7 is Consumers, Producers, and the Efficiency of Markets. This chapter explains consumer surplus, producer surplus and the total surplus in the market.

Consumer surplus

• the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer surplus

• the amount a seller is paid for a good minus the seller’s cost of providing it

Total surplus= consumer surplus + producer surplus= (value to byers- amount paid by buyers)+ (amount received by sellers- cost to sellers)

• amount paid by buyers= amount received by sellers- cost to sellers

• Total surplus= value to buyers- cost to sellers

Efficiency of Market

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

Definitions

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

2. Willingness to pay– the maximum amount that a buyer will pay for a good

3. Consumer surplus– the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

4. Cost– the value of everything a seller must give up to produce a good

5. Producer surplus– the amount a seller is paid for a good minus the seller’s cost of providing it

6. Efficiency– the property of a resource allocation of maximizing the total surplus received by all members of society

7. Equality– the property of distributing economic prosperity uniformly among the members of society

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