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Market Efficiency
Consumer surplus: the difference between the maximum price consumers are willing and able to
pay for a good or service and the price they actually pay. Consumer surplus can be thought of as
the wealth that trade creates for consumers in a market. Consumer surplus is measured in dollars.
Graphically, consumer surplus is the area below the demand curve and above the equilibrium
price, from zero to the quantity traded.
Welfare economics: a branch of economics that focuses on measuring the welfare of market
participants and how changes in the market change their well-being
Producer surplus: the difference between the price producers receive for a good or service and
the minimum price they are willing and able to accept. Producer surplus can be thought of as the
wealth that trade creates for producers in a market. Producer surplus is measured in dollars.
Graphically, it is the area below the equilibrium price and above the supply curve, from zero to
the quantity traded
Economic surplus: the sum of consumer and producer surplus; a measure of the total welfare, or
wealth, that trade created for consumers and producers in a market. Also known as social welfare
or total surplus
Deadweight loss: the value of the economic surplus that is forgone when a market is not allowed
to adjust to its competitive equilibrium.
Productive efficiency: producing output at the lowest possible average total cost of production;
using the fewest resources possible to produce a good or service
Allocative efficiency: producing the goods and services that are most wanted by consumers in
such a way that their marginal benefit equals their marginal cost.
●Allocative efficiency formula:
○Marginal benefit of last unit = marginal cost of last unit
■MB = MC
Production
Economic costs: the cost associated with the use of resources; the sum of explicit and implicit
costs
●Economic costs = explicit costs + implicit costs
Explicit costs: monetary payments made by individuals, firms and governments for the use of
land, labor, capital and entrepreneurial ability owned by others. Also known as accounting costs
Implicit costs: the opportunity costs of using owned resources; costs for which no monetary
payment is explicitly made; basically just the opportunity cost.
Accounting profit: total revenue minus the explicit costs of production
●Accounting profit = total revenue - explicit costs
Economic profit (as a measure): total revenue minus economic costs, which include both
explicit and implicit costs of production
●Economic profit = total revenue - (explicit costs + implicit costs)
Short run: the time period in which at least one input of production is fixed but other inputs can
be changed
A measure of the total welfare, or wealth, that trade creates for consumers and producers in a
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If you were willing to sell your used bike for $400, but someone paid you $500 for it, youreceived
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When a domestic country is small relative to world markets, is a price taker, and its consumptionand production do not affect the world price it can be studied using
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The effects that a change in market conditions, usually price, has on the welfare, or economicwell-being, of market participants are welfare effects________________________________________________________________________________The areas that show the economic surplus are areas A and BThe dollar value of the economic surplus is $4________________________________________________________________________________Graphically, total economic surplus is the entire area between the supply and demand curves,from a quantity of zero to the quantity tradedProducer surplus is the