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Consumers, Producers, and the Efficiency of Markets - Coggle Diagram
Consumers, Producers, and the Efficiency of Markets
Welfare economics
Consumer surplus
Willingness to pay
Value to buyers-amount paid by buyers
Producer surplus
Cost
Amount received by sellers-cost to sellers
Market efficiency
Equity
Total surplus
Consumer surplus + producer surplus
Value to buyers - cost to sellers
Insights concerning market outcomes
Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay.
Free markets allocate the demand for goods to the sellers who can produce them at least cost.
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
Evaluating market equilibrium
Laissez faire
Market power
Externalities
Theory of Consumer Choice
Budget constraint
Consumer preference
Marginal rate of substitution
Indifference curves
Properties
Indifference curves are bowed inward.
Higher indifference curves are preferred to lower ones.
Indifference curves are downward sloping.
Indifference curves do not cross.
Extreme examples
Perfect substitutes
Perfect complements
Optimization
Changes in Income
Normal good
Inferior good
Changes in price
Income effect
Substitution effect