Chapter 7 example #23980

the maximum amount that a buyer will pay for a good

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it Consumer surplus = Value to buyers - Amount paid by buyers

the value of everything a seller must give up to produce a good

the amount a seller is paid for a good minus the seller's cost of providing it Producer surplus = Amount received by sellers - Cost to sellers.

the property of a resource allocation of maximizing the total surplus received by all members of society

Total surplus = (Value to buyers - Amount paid by buyers) + (Amount received by sellers - Cost to sellers). The amount paid by buyers equals the amount received by sellers, so the middle two terms in this expression cancel each other. As a result, we can write total surplus as Total surplus = Value to buyers - Cost to sellers.

the property of distributing economic prosperity uniformly among the members of society

• Consumer surplus equals buyers' willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price. • Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve. • An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient. Policymakers are often concerned with the efficiency, as well as the equality, of economic outcomes. • The equilibrium of supply and demand maximizes the sum of consumer and producer surplus. That is, the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. • Markets do not allocate resources efficiently in the presence of market failures such as market power or externalities.

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