Consumers, Producers, Efficiency Economics Quiz

welfare economics
the study of how the allocation of resources affects economic well-being
willingness to pay
the maximum amount that the 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
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
price
that which is given up in an exchange to acquire a good or service
efficiency
the property of a resource allocation of maximizing the total surplus received by all members of society
total surplus
the sum of producer surplus and consumers surplus
consumer surplus equation
value to buyers – amount paid by buyers
producer surplus equation
amount received by sellers – cost to sellers
total surplus equation
consumer surplus + producer surplus
equality
the property of distributing economic prosperity uniformly among the members of society
buyer indifference
the buyer will feel neutral about purchasing a good at the same price they value it at
consumer surplus measures
the benefit buyers receive from participating in a market
marginal buyer
the buyer who would leave the market first if the price were any higher
consumer surplus on supply-demand graph
the area below the demand curve and above the price
economic well being
policymakers can use this to gauge the economy and to respect the preferences of the buyer
marginal seller
the seller who would leave the market first if the price were any lower
producer surplus on supply-demand graph
the area below the price and above the supply curve
market outcome insights
1. free markets allocate the supply of goods to the buyers who value them most highly, as measures 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
laissez faire
“allow them to do”; an economic theory that government should not regulate or interfere with commerce, but rather promote the economy
centrally planned economies
economic system in which the central government makes all decisions on the production and consumption of goods and services. Does not work because the task is practically impossible
Adam Smith
created the “invisible hand” theory
invisible hand
takes all information about buyers and sellers into account and guides everyone in the market to the best outcome as judged by the standard of economic efficiency
banned market goods
the government introduces a price ceiling of zero which causes for a shortage of that good
market power
the ability to influence prices; can cause markets to be inefficient because it keeps the price and quantity away from the equilibrium of supply and demand
externalities
side effects in an economy; cause welfare in a market to depend on more than just the value to the buyers and the cost to sellers
market failure
the inability of some unregulated markets to allocate resources efficiently; caused by market power and externalities