Be Sure to do the online quizzes at http://www.swlearning.com/economics/mankiw/mankiw3e/mankiw3e.html

1. Explain the concept willingness to pay.
- the maximum amount that a buyer will pay for a good
- measures how much the buyers value the good
- a buyer would be willing to buy a product at a price less than his willingness to pay, would refuse to buy the product at a price more than his willingness to pay, and would be indifferent to buying the product at a price exactly equal to his willingness to pay.

2. How do we use the demand curve to measure consumer surplus?

• consumer surplus is measured by the willingness of a buyer to pay for a certain product along the demand curve.
• i.e. if the price of a product were too high, how many people would leave the market etc.

3. How do lower prices raise consumer surplus?
Consumer surplus is a buyer's willingness to pay minus the amount the buyer actually pays. Therefore if prices are lower consumer surplus increases.

ex. If a consumer is willing to pay 5 pesos for an icecream cone and the price is actually 3..consumer surplus will be 2 pesos. If the price of the iceceram cone lowers..let's say 2 pesos...consumer surplus will be 3 pesos.

4. What does consumer surplus measure?

• The buyer's benefit, as they see it
• Official definition: the benefit that buyers recieve for a good as the buyers perceive it.
• I.e. If I am willing to buy an iphone for $400, and can buy it for $250, my consumer surplus is $150. The market price may indeed be $250, but as a consumer, I feel happy!

5. What does producer surplus measure?

• Producer surplus indicates the producers profit, which would be measured by the amount a seller is paid for a good, minus the seller's cost
• Ex. Shop sells tea cups for 20$, and they cost 15$ to make. The shop's poducer surplus is 5$

6. How can we use the supply curve to measure producer surplus?

• On the supply curve, the seller's costs are demonstrated
• The area below the price and above the supply curve shows the producer surplus
• Height of curve measures seller's costs, and producer surplus id shown by the area of the price and quantity created

7. How do higher prices impact producer surplus and why?

• higher prices raise producer surplus
• sellers recieve a higher price so they are willing to produce more
• now producers will recieve a higher price to lower production costs, which will increase the producer surplus

8. How do we maximize both producer and consumer surplus?

• By allowing the price to reach market equilibrium, at quantities less than the equilibrium the value to buyers exceeds the cost to sellers. At quantities greater than the equilibrium quantity the cost to sellers exceeds the value to buyers.
  
• total surplus must also be maximized through effective allocation of resources = efficiency

9. How is efficiency promoted?
By maximizing total surplus (total surplus = consumer surplus and producer surplus or total surplus= value to buyers - cost to sellers) To do this goods must be produced by sellers at lowest cost, and good must be consumed by consumers who value it most highly. Free trade (no taxes) is a good way to promote efficiency. More competitive markets are also more efficient.

10. How is equity promoted?
Leaving the market to be free, automatically promotes equity.
Distribution of well-being fairly helps promote - care both about the economy and how the economy is distributed amongst people in a society
normative judgements

11. Explain how ticket scalping is an example of how the market reaches efficient outcomes (pg. 156-7)
Scalpers buy tickets to plays, concerts ,etc, and then resell the ticket at a price above original cos. By charging the highest price the market will bear, scalpers help ensure the consumers with the most willingness to pay for the tickets get tickets.

12. What is market failure and how is it related to welfare economics.

• Market failure is the inability of some unregulated markets to allocate resources efficiently. This is due to factors such as market power or externalities.
• economists study market failure & what policies can correct the failures
• welfare economics can be adapted to problems such as 'market failure'