Chapter 7

Chapter 7 talks about welfare economics, which is the study of how the allocation of resources affects economic well being. Consumer surplus is the amount a buyer is willing to pay for an item minus the amount they actually paid for that item. This relates to the demand curve. It can be measured on a graph by the area under the demand curve and above the price. As the price of an item falls, the consumer surplus increases because buyers are paying less for the product than before and because new buyers enter the market. Producer surplus relates to the supply curve. It is the amount a seller is paid for an item minus the seller's cost of providing that item. It can be measured on the graph as the area above the supply curve and below the price. As price rises, producer surplus increases because sellers already on the market will sell more of the product and because new sellers will enter the market. Producer surplus measures the economic well being of producers. Consumer surplus measures the economic well being of consumers. Total surplus is the value to buyers minus the cost to sellers. It is maximized at the market equilibrium. By saying markets are efficient, it is assumed that they are perfectly competitive markets and that there are no externalities. I thought this chapter was pretty interesting. I thought the case study on the potential market in organs was intriguing because it was a unique scenario that made the concepts in this chapter easy to understand in a relatable context.