Welfare economics
The study of how the allocation of resources affects economic well-being
Consumer surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
CS (as a “formula”)
CS= value to buyers - actual amount paid by buyers
———————
As an area below the demand curve till the price
———————
⬇️P —> ⬆️CS
Producer Surplus
The amount sellers is paid for a good minus the seller’s costs of providing it
——————————
As an area from above the supply curve to the price
——————————
⬆️P —> ⬆️PS
Willingness to pay
The maximum amount that a buyer will pay for a good
Efficiency
The property regarding a resource allocation of maximising the TS received by all members of society
Total Surplus
TS= value to buyers - cost to sellers
(Max-min)
Marginal buyer
The buyer who would leave the market first if the price were any higher
Marginal seller
The seller who would leave the market first if the price were any lower
Market resource allocation (“laws” of efficiency)
1) Competitive markets allocate the supply of goods to buyers who value the most, as measured by their willingness to pay;
2) Competitive markets allocate the demand for goods to sellers who can produce at the lowest cost;
3) Competitive markets produce the quantity of goods to maximise the sum of CS and PS (that is, TS)
