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https://quizlet.com/_41aldw

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https://docs.google.com/document/d/1Jsx7e-Yux-4RqapPOcdlUNjRtapf7PV0ffjmOjlKEq8/edit

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study of how the allocation of resources affects economic well-being

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study of how the allocation of resources affects economic well-being

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if P < willingness... BUY IT
if P > willingness... DON'T BUT IT

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most willing buyers put the highest value on the good

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most willing buyers put the highest value on the good

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free markets allocate supply of goods to buyers who value them most

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Using Demand Curve to Measure Consumer Surplus

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Using Demand Curve to Measure Consumer Surplus

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demand schedule/curve derived from willingness to pay

Area above price and below demand curve IS consumer surplus

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How a lower price raises consumer surplus

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How a lower price raises consumer surplus

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a decrease in price increases consumer surplus --> the triangle grows

Why?
1. buyers already in the market gain consumer surplus by paying less
2. new buyers enter the market enticed by lower price

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CS is a good measure of economic well being for rational buyers

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cost includes opportunity cost!

if P < cost... DON'T SELL IT
if P > cost... SELL IT

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most willing sellers have the lowest costs

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most willing sellers have the lowest costs

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free markets allocate goods demanded to sellers who have the lowest costs

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Using Supply Curve to Measure Producer Surplus

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Using Supply Curve to Measure Producer Surplus

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supply schedule/curve derived from costs

Area below price and above supply curve IS producer surplus

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How a higher price raises producer surplus

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How a higher price raises producer surplus

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an increase in price increases producer surplus --> the triangle grows

Why?
1. sellers already in market gain producer surplus by charging more
2. new sellers enter market enticed by profts

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Consumer and Producer Surplus are used to study economic welfare of buyers and sellers

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Consumer and Producer Surplus are used to study economic welfare of buyers and sellers

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sum of CS and PS

CS = benefit the buyers receive
PS = benefit sellers receive

total surplus = value to buyers - cost to sellers

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(size of the pie)

MAXIMIZE TOTAL SURPLUS  @ equilibrium

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(how the pie is cut)

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total area between supply and demand curves up to the point of equilibrium represents total surplus

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total area between supply and demand curves up to the point of equilibrium represents total surplus

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1. free markets allocate supply of goods to buyers who value them most highly
2. free markets allocate goods demanded to sellers who can produce them and the lowest cost
3. free markets produce the quantity of goods that maximize the sum of producer and consumer surplus (aka total surplus)

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At any quantity below equilibrium, the value to the marginal buyer is greater than the cost to the marginal seller

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At any quantity below equilibrium, the value to the marginal buyer is greater than the cost to the marginal seller

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any Q below E, value to buyer > cost to seller

an increase in quantity would increase total surplus

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At any quantity above equilibrium, the value to the marginal buyer is less than the cost to the marginal seller

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At any quantity above equilibrium, the value to the marginal buyer is less than the cost to the marginal seller

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any Q above E, value to buyer < cost to seller

a decrease in quantity would increase total surplus