Chapter 7 Study Guide – Flashcards with Answers

-The study of how the allocation of resources affects economic well-being -How consumers and producers are affected alike

-The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it (Willingness Price-Actual price) Ex. John, Paul, Ringo, and George are willing to buy Elvis CD (John=$100), (Paul=$80), George ($70), and Ringo ($50); between $70 and $80, the quantity demanded is 2 because Ringo and George dropped out of the market leaving John and Paul -John's consumer surplus=$20 -Paul's consumer surplus=$10

-The person who would leave the market first were the price of the good higher than their willingness to pay -With the John, Paul, Ringo, and George example, Ringo would be the marginal buyer because he was willing to pay the least of them all at $50

-The area below the demand curve and above the price measures the consumer surplus in a market -Usually depicted as a square or triangle

-The value of everything a seller must give up to produce a good Ex. For a painter, this would be the cost of paint, paintbrushes, buckets, etc.

-The amount a seller is paid for a good minus the seller's cost of providing it (Amount seller is paid-Seller's cost of providing it)

-The seller that would leave the market first were the price of the good any lower than their willingness to sell

-The area below the price and above the supply curve measures the producer surplus in a market

Total Surplus=Producer Surplus + Consumer Surplus

-When allocation of resources maximizes total surplus Examples of Inefficient Allocation: -If a good is not being produced by the sellers at the lowest costs possible (high input costs) -If a good is not being consumed by the buyers who value it most highly

-The process of distributing economic property uniformly among the members of society, so they have similar levels of economic well-being

1. Free markets allocate the supply of goods to buyers who value them mostly 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

Benefits to Selling Organs: -People usually only need one kidney, so selling one would rarely backfire -People suffer from illnesses that leave them without working kidneys, therefore, they would need to buy one so as to survive (long waiting lists are also a problem) -Quantity would always meet demand -Buyers and recipients would both benefit Cons to selling Organs: -Market for organs would benefit the rich at the expense of the poor because organs would then be allocated to those most willing and able to pay