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USC - ECON 221 - Micro Test #2 Review Sheet - Study Guide

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Schools > University of South Carolina > OTHER > ECON 221 > USC - ECON 221 - Micro Test #2 Review Sheet - Study Guide

USC - ECON 221 - Micro Test #2 Review Sheet - Study Guide

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background image Ch 4:  Consumer Surplus and the Demand Curve:  Consumer Surplus = Willingness to pay – Price paid  -  Willingness to Pay: Maximum price at which a consumer would buy a good.  -  Total Consumer Surplus: sum of all individual consumer surplus.  -  P C :   -  P:   -  Q M :   -  Total consumer surplus is equal to the area below the demand curve but  above the price.  o  Area of a Triangle = (1/2)bh   o  Area below demand curve  = (1/2)(P c -P MARKET )Q M                 Changes in Consumer Surplus: Changes in quantity of buyers (shaded triangle on graph)  Two sources of increase in CS: In “decrease” same process vice versa  -  Original buyers – because of price drop  -  New buyers that now enter the market who will buy because of price drop 
background image Price Discrimination: The sale of a G/S at different prices to different customers.  -  Consumer becomes profits  -  Ex: “buy one get one free”, Ladies night  Producer Surplus and the Supply Curve:   Producer Surplus = Price received – Cost   -  Cost: Lowest price at which a potential seller is willing to sell   -  WTS:   -  Total producer surplus is equal to the area above the supply curve but  below the price.                    Changing Prices Affect on Producer Surplus:   -  Fall in price reduces PS  -  Rise in price increases PS  -  Calculate area of triangle created by rise in price   
background image Gains from Trade:  Total Surplus:  Net gain to consumers and producers from trading in a market.              (TS = PS + CS)  3 Ways to Increase Total Surplus:  1)  Reallocate Consumption Among buyers 
2)  Reallocate Sales Among Producers 
3)  Change the Quantity that Gets Traded 
  1)  Reallocate Consumption: Lowers Consumer Surplus            2)  Reallocate Sales: Lowers Producer Surplus              3)  Change Quantity Traded: Lowers Total Surplus         
background image ~ Total surplus: Measures gains from trade in a market 
~ Markets are: Efficient except under some well-defined conditions 
~ When total surplus is maximized: No one can be made better off without making 
someone else worse off. 
  The Four Important Functions of an Efficient Market:  1)  Allocates consumption of the good to the potential buyers who most value it,  as indicated by the fact that they have the highest WTP (willingness to pay)  2)  Allocates sales to the potential sellers who most value the right to sell the  good more than every other seller who makes a sale, so that all transactions  are mutually beneficial.  3)  Ensures that every consumer who makes a purchase values the good more  than every seller who makes a sale, so that all transactions are mutually  beneficial.  4)  Ensures that every potential buyer who doesn’t make a purchase values the  good less than every potential seller who makes a sale, so that no mutually  beneficial transactions are missed.  *** As a result of these four functions, any way of allocating the good other  than the market equilibrium outcome lowers total surplus. ***    ~ Markets although efficient are NOT necessarily Equitable (fair).  ~ Markets sometimes fail to deliver efficiency. Meaning they no longer  maximize total surplus.  Market equilibrium maximizes total surplus. Which does not mean that it  results in the best possible outcome for every individual consumer or producer. 
background image Equity and Efficiency:  -  Efficiency is the best way to achieve a goal  -  Equity addresses which goal should be achieved  -  There is often a tradeoff between equity and efficiency  -  A social choice to pursue equity over efficiency is not necessarily bad.    *** Well meaning people can disagree about what is equitable. ***    Why Markets Typically Work So Well:  2 powerful features:  1)  Property Rights: Valuable items in the economy have specific owners, who  can dispose of them as they choose.  a.  This allows people to resell items without limitations  2)  Economic Signals: Any piece of information that helps people and businesses  make better economic decisions.  a.  Ex: If businesses are buying lots of cardboard boxes, you can be sure  that will soon increase production.             

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School: University of South Carolina
Department: OTHER
Course: Principles of Microeconomics
Professor: John Gordanier
Term: Spring 2017
Tags: Consumer, surplus, demand, curve, Government, control, elasticity, Taxes, and cost
Name: Micro Test #2 Review Sheet
Description: Test #2 review sheet Dr. Hess
Uploaded: 03/05/2018
22 Pages 73 Views 58 Unlocks
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