Exam 7: Consumers Producers and the Efficiency of Markets: Part B

Suppose you buy an iPod for $100.If your consumer surplus is $30,your willingness to pay is $70.

If Darby values a soccer ball at $50,and she pays $40 for it,her consumer surplus is $10.

In a competitive market,sales go to those producers who are willing to supply the product at the lowest price.

All else equal,an increase in demand will always increase consumer surplus.

If producing a soccer ball costs Jake $5,and he sells it for $40,his producer surplus is $45.

Producing a soccer ball costs Jake $5.He sells it to Darby for $35.Darby values the soccer ball at $50.For this transaction,the total surplus in the market is $40.

The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good.

Economists generally believe that,although there may be advantages to society from ticket-scalping,the costs to society of this activity outweigh the benefits.

Economists argue that restrictions against ticket scalping actually drive up the cost of many tickets.

The lower the price,the lower the consumer surplus,all else equal.

Let P represent price;let QS represent quantity supplied;and assume the equation of the supply curve is .If 80 units of the good are produced and sold,then producer surplus amounts to $1,200.

The equilibrium of supply and demand in a market maximizes the total benefits to buyers and sellers of participating in that market.

Let P represent price;let QS represent quantity supplied;and assume the equation of the supply curve is .If 90 units of the good are produced and sold,then producer surplus amounts to $1,350.

In order to conclude that markets are efficient,we assume that they are perfectly competitive.

Free markets allocate (a)the supply of goods to the buyers who value them most highly and (b)the demand for goods to the sellers who can produce them at least cost.

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

When markets fail,public policy can potentially remedy the problem and increase economic efficiency.

Connie can clean windows in large office buildings at a cost of $1 per window.The market price for window-cleaning services is $3 per window.If Connie cleans 100 windows,her producer surplus is $100.

A buyer is willing to buy a product at a price greater than or equal to his willingness to pay,but would refuse to buy a product at a price less than his willingness to pay.

All else equal,a decrease in demand will cause an increase in producer surplus.