Goal of Consumers?
maximize satisfaction and maximize utility. It is subject to our income
Goal of producers?
maximize profiy
What are the 2 approaches (efficiency)
Cardinal and ordinal approach
Def. Cardinal approach
based on measurement of consumer's utility
Def. ordinal approach
based on consumer's ranking, their preferences
What is the law of diminishing marginal utility?
eventually marginal benefit will decrease. It has to decrease;increases of consumption of a good must eventually decrease marginal utility
Def. Marginal Utlity
the change in total utility with respect to quantity. It can rise at first, but eventually it always decrease
What is the formula of Marginal Utility?
Change in Total Utility / change in quantity
What are the steps for taking in account the respective price. (You have $8, What combination of goods do you consume to maximize Total Utility?)
1. Find MU 2. MU/ Price 3. Make combinations to equal $8 4. Add the total utility of the combinations by looking at the table
Consumers want to maintain a balance between ____
MU/P
Def. Marginal Benefit
Measures the benefit for each additional unit (think MB as a demand curve) or the maximum amount the consumer would pay
The MB curve reflects the...
value received from an additional unit and not the actual price paid
Def. Marginal Cost
the additional cost with producing one more unit. (think MC as supply)
The MC curve reflects the....
cost of producing on more additional unit
Def. Perfectly Competitive Market
MC is the actual supply curve b/c it is used to predict how many units the producer is willing and able to produce
Def. Consumer Surplus
the maximum amount the consumer is willing to pay minus the price the consumer has to pay (think demand graph)
How is consumer surplus shown on a graph?
It is below demand, above price paid, and the rest is restricted by quantity bought and sold
Def. Producer Surplus
the actual amount a producer receives for a product minus the minimum amount the producer is willing to take (supply graph)
How is producer surplus shown on a graph?
It is above supply, below price received, restricted by quantity bought and sold
Formula for triangle?
1/2 (b x h)
Def. Total Surplus
consumer surplus + producer surplus
When is a market efficient?
When MB = MC or when Quantity supplied + quantity demanded, or when supply intersects demand
What is the reason for market efficiency?
because Total surplus is maximized. its a good thing
What are the 5 sources of inefficiency?
1. price controls 2. taxes, tariffs, quotas 3. monopolies 4. externalities 5. public goods
Def. Dead Weight Loss (DWL)
The reduction in total surplus that occurs when Q is not at the intersection (S + D)
What drives DWL??
the amount of Q
How is DWL shown in a graph?
it's the triangle between the Q(e) = Q actually being bought and sold
When do you consume or produce?
as long as MB is greater than or equal to the marginal cost
When do you stop consuming or producing?
stop when MB = MC
Economic models assume that consumers are
rational utility maximizers with limited income
The cardinal approach of the study of consumer utility is based on the assumption of
the amount of utility (utils), or satisfaction, which a consumer receives from a product can be measured
The ordinal approach?
consumers can rank preferences, but cannot precisely measure utility
Consumer surplus is the difference between ______ and product price and producer surplus is the difference between _______ and product price.
marginal benefit;marginal cost
A demand curve can be interpreted as a
marginal benefit curve
a supply curve can be interpreted as a
marginal cost curve
Buyers gain consumer surplus when the market price is
less than the highest price buyers are willing to pay
If betty is willing to pay $45 for a new purse but only has $30, betty will...
enjoy consumer surplus if she purchases the purse
Alice's Cleaning Service agrees to add a new client for $50 a week although they would be willing to accept $25 to perform these services illustrates....
the concept of producer surplus
The difference between the highest price a consumer will pay and the actual market price is called ________
consumer surplus
The difference between the actual market price and the lowest price a seller will accept is called _________
producer surplus
When exchange in a market occurs such that the MB of the last unit bought and sold is equal to the MC of the last unit bought and sold:
total consumer and producer surplus is maximized
Assuming that demand is downward sloping and everything else remains the same, an increase in the supply of a product leads to:
an increase in consumer surplus