measure of benefits from being able to purchase a good Both Individual and Total ='s total net gain
measure of the benefits sellers receive from being able to sell a good. Purchases yield a net benefit to consumer , b/c consumer typically pays a price less than his or her willingness to pay for the good. Right to buy a good at going price is a valuable thing in itself
Let's us calculate how much benefit producers and consumers receive from the existence of a market. Allow us to calculate how the welfare of consumers and producers is affected by changes in market prices. Help us evaluate economic policies. Only need demand and supply curves to calculate
Willingness to Pay
Maximum price at which one would buy a good
Individual Consumer Surplus
Net gain to a buyer from purchase of good. Equal to difference b/w buyer's willingness to pay and the price paid.
Total consumer Surplus
Sum of individual consumer surpluses of all buyers TCS generated by consumers is = to area below demand curve but above the price Area or right triangle A=(h x b)/2
lowest price at which a potential seller is willing to sell. Called "cost" b/c of associated opportunity cost to selling. OC is true measure of cost of doing something is always it's OC
Individual Producer Surplus
net gain to individual seller from selling a good. = to the difference b/w the price received and the seller's cost.
Total Producer Surplus
Total net gain to sellers in market. Total produce surplus from sales of a good at a given price is the area above the supply curve but below the price
Impact of price change
↓Price will ↑consumer surplus & ↓producer surplus
↑Price will ↓consumer surplus & ↑producer surplus
Increases through 2 channels: gains of those who would have supplied the good at original price and the gains of those who are induced to supply the good by the higher price. A fall in the price of a good similarly leads to a fall in producer surpluses
generated in a market is total net gain to consumers and producers from trading in the market. It is the sum of the producer and the consumer surplus. Illustrates "gains from trade" concept. Leads to market efficiency.
Reallocate Consumption among consumers
Results in making a good from a consumer who values it more and giving it to one who values it less. Reduces total consumer surplus
Reallocate Sales among Sellers
Those who sell the good are those who most value the right to sell the good. Forcing a seller to sell above costs results in reducing total producer surplus
Change The Quantity Traded
Preventing a sale in the market reduces Total Surplus. At market equilibrium, only mutually beneficial transactions occur.
Well functioning Markets
Property rights Rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose
Economic signals is any piece of info that helps people make better economic decisions
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