Brief study guide exam 2 PDF

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Study guide for the 2nd exam...

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Chapter 7. 1. Welfare Economics: studies how the allocation of resources affects economic well being 2. Willingness to pay (WTP) – the maximum amount a buyer will pay for a good a. Know how many people will buy a good given their WTP and market price b. At any quantity, the height of the demand curve on a graph measures the WTP of the marginal buyer, the buyer who would leave the market if P got any higher 3. Consumer surplus (CS) – amount buyer is WTP minus amount buyer actually pays a. CS= WTP – P b. Total CS equals each individual’s CS added together, or the area under the demand curve, above the price from 0 to quantity demanded. c. Fall in CS due to buyers leaving the market on a graph d. Fall in CS due to remaining buyers paying a higher price 4. Cost and the supply curve a. Cost is value of everything a seller must give up to produce a good (Opportunity cost) i. Seller produces and sells the good/service only if the price exceeds his or her cost ii. Cost measures willingness to sell 1. At each Q, height of supply curve is the cost of the marginal seller, or the seller who would leave the market if the price were any lower b. Producer Surplus (PS) = Price – Cost i. Total PS equals area above the supply curve and under the price between 0 and quantity supplied. ii. Fall/rise in PS due to sellers leaving or entering market iii. Fall/rise in PS due to remaining sellers getting lower/higher price 5. Total Surplus (TS) = CS + PS a. TS = (value to buyers) – (cost to sellers) b. TS measures society’s well being. i. Allocation of resources is efficient if it maximizes total surplus 1. Efficient means: a. Goods consumed by buyers who value them most highly b. Goods produced by sellers with lowest cost c. Raising or lowering quantity of good will not increase total surplus ii. E.g. Total surplus is maximized at the market equilibrium!! Chapter 9. 6. Comparative advantage: country has comparative advantage in a good if it can produce that good at a lower opportunity cost than other countries a. Countries gain from trade if each exports the goods in which it has comparative advantage PW = World price of a good 7. 8.

PD = domestic price of a good, without trade

a.

PD reflects oportunity cost of producing the good (how much person has to give up to obtain one unit of the good

b.

If PD...