Macro. Chap. 4

willingness to pay

the maximum amount that a buyer will pay for a good

individual consumer surplus

The net gain to an individual buyer from the purchase of a good. Equal to the difference between the buyer's willingness to pay and the price paid.

total consumer surplus

the sum of the individual consumer surpluses of all the buyers of a good in a market

total consumer surplus principle

The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price.

seller's cost

the lowest price at which a potential seller is willing to sell

individual producer surplus

The net gain to an individual seller from selling a good. Equal to the difference between the price received and the seller's cost.

total producer surplus

the total net gain to all sellers in the market

total surplus

The total surplus generated in a market is the total net gain to consumers and producers from trading in the market. Equal to the sum of the producer and the consumer surplus.

Methods to manipulate total surplus

1. Reallocate consumption among consumers
2. Reallocate sales among sellers
3. Change the quantity traded

Four functions of an efficient market

1. It allocates consumption of the good to potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay.
2. It allocates sales to the potential sellers who most value the right to sell the good, as indicated b

property rights

the rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose

economic signal

any piece of information that helps people make better economic decisions

inefficient market

an economy in which there are missed opportunities; some people could be made better off without making other people worse off.

market failure

occurs when a market fails to be efficient


actions of individuals that have side effects on the welfare of others that markets don't take into account