Micro Chapter 4 Exam 1

• a consumer's willingness to pay (WTP) for a good
• = he maximum price at which he/she would buy that good

the net gain to an individual buyer from te purchase of a good

• the net gain to an individual buyer from the purchase of a good
• = difference b/w the buyer's WTP and the price paid
• Total consumer surplus: the sum of all individual CSs

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

= the minimum price at which he/she is willing to sell the good

• the net gain to a seller from selling a good
• = difference b/w the price received and the seller's cost

the sum of all individual producer surplus

the total producer surplus from sales of a good at a given price is the area above the supply curve but below that price

• Gains from trade in the market
• competitive markets help us to reach maximum possible total surplus at market equilibrium

• 1. reallocating consumption among consumers
• Take a g/s from a buyer with WTP higher than P* and give it to a person with WTP lower than P*
• 2. Realocating sales among sellers
• Take sales from a seller with costs lower than P* and force
• a seller with costs higher than P* to sell it
• 3. Changing the quantiy traded
• Compel buyers and sellers to trade either more or less than Q*

• It allocates consumption of g/s to the potential buyers with the highest WTP
• It allocates sales to the potential sellers w/the lowest costs
• it ensures mutual benefits: WTPbuyer > Cseller
• if WTPbuyer < C seller, no mutually beneficial trade possible

give freedom of disposal of what you own

Signals buyers and sellers reservation prices and maket dis-/equilbrium

• Market Failure
• Externalities
• Smart for one, dumb for all!!
• Market Control
• Price Control
• Quantiy Control