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ECON 1B Chapter 7 Notes
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- ECON 1B
This is a comprehensive and detailed note on Chapter 7; Efficiency of markets. An Essential Study Resource just for YOU!!
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Market Efficiency● Welfare economics is the study of how economic decisions affects well-being
● We will find the equilibrium of supply and demand that maximizes the combined benefits for
buyers and sellers.
Consumer Surplus
● Willingness to pay is the maximum amount that a buyer will pay for a good and how much
the buyer values it
● Consumer surplus is the amount a buyer is willing to pay for a good minus amount the buyer
actually pays (Willingness to pay minus price paid)
● The area below the demand curve and above the price is the consumer surplus in the
market
● It measures the benefits buyers receive from participating in a market, which is closely
related to the demand curve
● At any quantity, the price given by the demand shows the willingness to pay of the marginal
buyer
● Marginal buyer is the buyer who would leave the market first if the price were any higher
● Lower prices increases consumer surplus Ex. New buyers enter the market and are willing to
buy the good at a lower price; existing buyers buy at a better deal than before
● Most goods benefit the economic well-being while other goods like drugs
● To calculate consumer surplus: the willingness to pay- market value and add up all the
differences for the total consumer plus
● CS before tax= 1/2 * [Y-intercept of demand curve - before tax price(equilibrium price)] * before
tax quantity(equilibrium quantity)
● CS after tax= 1/2 * [Y-intercept of demand curve - Price paid by buyers after tax(price above tax
revenue wedge)] * Quantity traded after tax(right side of tax wedge square quantity)
Producer Surplus
● PS before tax= 1/2 * [Before tax price(equilibrium price) - Y-intercept of supply curve] * before
tax quantity(equilibrium quantity)
● PS after tax= 1/2 * [Price received by sellers after tax(bottom of tax revenue wedge) - Y-intercept
of supply curve] * Quantity traded after tax(right side of tax wedge square quantity)
● Cost is the value of everything a seller must give up to produce a good
● Producer surplus: It is measured as the amount a seller is paid minus the cost of
production
● Consumer surplus plus producer surplus is an efficient allocation of maximum resources
● Total area of surplus is the area of the triangle
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