Consumers, Producers, Efficiency Economics Quiz

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welfare economics
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the study of how the allocation of resources affects economic well-being
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willingness to pay
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the maximum amount that the buyer will pay for a good
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consumer surplus
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the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
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cost
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the value of everything a seller must give up to produce a good
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producer surplus
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the amount a seller is paid for a good minus the seller’s cost of providing it
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price
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that which is given up in an exchange to acquire a good or service
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efficiency
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the property of a resource allocation of maximizing the total surplus received by all members of society
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total surplus
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the sum of producer surplus and consumers surplus
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consumer surplus equation
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value to buyers – amount paid by buyers
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producer surplus equation
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amount received by sellers – cost to sellers
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total surplus equation
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consumer surplus + producer surplus
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equality
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the property of distributing economic prosperity uniformly among the members of society
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buyer indifference
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the buyer will feel neutral about purchasing a good at the same price they value it at
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consumer surplus measures
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the benefit buyers receive from participating in a market
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marginal buyer
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the buyer who would leave the market first if the price were any higher
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consumer surplus on supply-demand graph
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the area below the demand curve and above the price
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economic well being
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policymakers can use this to gauge the economy and to respect the preferences of the buyer
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marginal seller
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the seller who would leave the market first if the price were any lower
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producer surplus on supply-demand graph
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the area below the price and above the supply curve
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market outcome insights
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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
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laissez faire
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“allow them to do”; an economic theory that government should not regulate or interfere with commerce, but rather promote the economy
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centrally planned economies
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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
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Adam Smith
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created the “invisible hand” theory
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invisible hand
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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
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banned market goods
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the government introduces a price ceiling of zero which causes for a shortage of that good
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market power
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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
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externalities
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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
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market failure
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the inability of some unregulated markets to allocate resources efficiently; caused by market power and externalities

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