Principles of Economics Study Set 2

Welfare economics is the study of the welfare system.

The highest price a buyer is prepared to spend on a good, is that buyer's willingness to pay.

The appropriate measure for buyers' valuation of a good is how willing they are to pay.

Consumer surplus is the amount a buyer actually has to pay for a good minus the amount the buyer is willing to pay for it.

When a good is purchased, the difference between what a consumer is willing to pay and what they actually have to pay is consumer surplus.

For any given quantity, the price on a supply curve represents the marginal buyer's willingness to pay.

Consumer surplus is closely related to the demand curve for a product.

To measure the total consumer surplus in a market, the area above the demand curve is added to the area below the price.

The height of the demand curve measures the value buyers place on the good, as measured by their willingness to pay for it.

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.

Suppose a market clears and this generates an equilibrium price and quantity. An important outcome of this equilibrium is that it maximises the total benefits to both buyers and sellers.

When the market price of a good falls, consumer surplus increases because (1) the consumer surplus received by existing buyers becomes larger and (2) more buyers enter the market at the lower price.

In all markets consumer surplus measures the economic wellbeing in that market.

Each seller of a product is willing to sell as long as the price he or she can receive is greater than the opportunity cost of producing the product.

In a competitive market, sales go to those producers who are willing to supply the product with the best after-sales service.

The opportunity cost for a seller should only include their cash expenses on inputs.

A supply curve provides a graphical measure of a producer's true willingness to sell.

Producer surplus is the amount a seller is paid minus the cost of production.

Lee can sell coffee at $1 per cup. The market equilibrium price of coffee is $2.50. Suppose Lee sells 200 cups of coffee. The producer surplus captured by Lee is $500.

Any goods not sold in a vegetable market at the end of the day are producer surplus.