Management MGT 100 Lecture Notes - Lecture 3: Market Power, Market Failure, Economic Surplus

• School: WUSTL
• Department: Management
• Course: Management MGT 100
• Professor: Kiousis Konstantina

Document Summary

Welfare economics is the study of how the allocation of resources affects economic well-being. Each buyer has a maximum, called a willingness to pay, that measures how much that buyer values the good. Consumer surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. The area below the demand curve and above the price measures the consumer surplus in a market. Cost is a consumer"s out of pocket expenses and their opportunity cost. Producer surplus: the amount a seller is paid minus the cost of production. The area below the price and above the supply curve measures the producer surplus in a market (on a supply curve) The sum of consumer and producer surplus is total surplus. Consumer surplus = value to buyers - amount paid by buyers. Producer surplus = amount received by sellers - cost to sellers.