AP Micro CH 7 Quizlet Thingy

I'm only in this for my financial lit credits

Allocation of Resources

\-How much of each good is produced

\- Which producers produce it

\- Which consumers consume it

Welfare Economics

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

Willingness to Pay (WTP)

The maximum amount that a buyer will pay for a good; how much the buyer values the good

Marginal Buyer

The buyer who would leave the market first if the price were any higher

Demand Curve

The WTP of the marginal buyer

How does the WTP affect the Demand Curve?

The more buyers there are, the more steps there are, the smoother the curve is

Consumer Surplus (CS)

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

Consumer Surplus Formula

CS = WTP - P

Where is CS in the Demand Curve?

CS is the area under the demand curve above the price (0 to Q)

CS & a Smooth Demand Curve

Area between P and the D curve

Calculating CS from a Demand Curve

Find the area of the triangle from finding P

How Does a Higher Price Reduce CS?

1\. Fall in CS due to buyers leaving market

2\. Fall in CS due to remaining buyers paying higher P

Cost

Value of everything a seller must give up to produce a good

What Does the Term Cost Include?

Cost of all resources used to produce a good, including the value of a seller's time

Sellers' Production/Sale Rule

A seller will produce and sell the good if the price exceeds their cost (cost is a measure of willingness to sell)

CS & the Supply Curve

The supply curve is the cost of the marginal seller

Marginal Seller

The seller who would leave the market if the price were any lower

Producer Surplus (PS)

The amount a seller is paid for a good minus the seller's cost of providing it

Producer Surplus Formula

PS = P - cost

PS & the S Curve

PS is the area above the supply curve under the price

Calculating PS from a Smooth S Curve

Calculate with the triangle area formula, using P and Q.

How does a Lower Price Reduce PS?

1\. Fall in PS due to sellers leaving the market

2\. Fall in PS due to remaining sellers getting lower P

CS Equation

Value to Buyers - Amount Paid by Buyers = Buyers' Gains from Participating in the Market

PS Equation

Amount Received by Sellers - Cost of Sellers = Sellers' Gains from Participating in the Market

Total Surplus Formula

CS + PS

Total Surplus

Total gains from trade in a market

Total Surplus Equations

Value to Buyers - Cost to Sellers

CS + PS

Allocation of Resources in a Market Economy

\- The allocation is decentralized

\- Determined by the interactions of buyers and sellers

Total Surplus & Market Allocation of Resources

\- Determine if the allocation of resources is good or not

\- Total surplus is a measure of society’s wellbeing

\- Consider if the allocation is efficient or not

Efficiency Formula

Total Surplus = Value to Buyers - Cost to Sellers

When is an Allocation of Resources Efficient?

When it maximizes total surplus

Efficiency Definitions

\- The goods are consumed by the buyers who value them most

\- The goods are produced by the producers with the lowest costs

\- Raising or lowering the quantity of a good won’t increase total surplus

Market Equilibrium

The point of intersection of demand and supply curves of a given commodity; at equilibrium, the market is cleared of the commodity

Does Equilibrium Quantity Maximize Total Surplus?

The market equilibrium quantity maximizes total surplus: At any other quantity, can increase total surplus by moving toward the market equilibrium quantity.

Invisible Hand

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all

Government Intervention & The Free Market

The government can't raise the total surplus by changing the market's allocation of resources

Laissez-Faire

Policy that government should interfere as little as possible in the nation's economy.

Free Market vs. Central Planning

It is impossible for a central planner to allocate resources. To allocate resources efficiently and maximize total surplus, the planner would need to know every seller's cost and every buyer's WTP for every good in the entire economy.

Market Failures

\- A buyer or seller has market power (affect the market price)

\- Transactions have side effects that affect bystanders

Market Power

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

Externalities

A side effect of an action that affects a third party other than the buyer or seller.

Height of the Demand Curve

Reflects the value of the good to buyers and their WTP

Consumer Surplus

Difference between what a consumer is willing to pay for a good and the amount actually paid

Consumer Surplus on a Graph

The area between the demand curve and the price

Height of the Supply Curve

Sellers' cost of producing the good

When are Sellers Willing to Sell?

If the price they get is at least as high as their cost

Producer Surplus

Difference between what sellers receive for a good and their cost of producing it

Producer Surplus on a Graph

The area above the supply curve and below the price

Efficiency in Regards to Total Surplus

\- Total surplus is maximized

\- Goods are produced by sellers with the lowest cost

\- Goods are consumed by buyers who most value them

\- Alterations reduce total surplus

Perfect Competition

Market outcome is efficient