Welfare Economics / Consumer Behavior

Welfare Economics
-The study of how our allocation of resources affects the economic well-being of the participants in the markets.

-Free Market makes the economy as a whole work at a maximumI: Consumer Surplus
-Each consumer has their maximum willingness to pay
-usually this is very flexible
-The difference between the consumer’s willingness to pay, and the price they actuallypay in the market
-How much the consumer benefits (financially and/or psychologically) from a given price

-Demand shows the maximum willingness to pay

-Lower Price => Higher Consumer Surplus-Higher Price => Lower Consumer Surplus

II: Producer Surplus
-The difference between the Price that the Producers can get on the market and the Cost of Production (aka Profit)
-Supply representsthe Marginal Cost of Production

-Supply is upwards curving because the opportunity cost increases

III: Total Surplus
-Total Surplus = Consumer Surplus + Producer Surplus
-The differencebetween the consumer’s willingness to pay and the cost of production

IV: The Beauty of Free Markets

-Gross Price is the price paid by consumers

- C + F (From notepaper graph) is a deadweight loss.-The resources are not allocated efficiently. A deadweight loss is a loss from one party that does not benefit anyone else. In the whole market case, the loss is taken by society in general.________________________________________________________________





Consumer Behavior/Utility

-Consumer Behavior deals with how consumers make decisions
-Consumers make their decisions basedon how much satisfaction they expect as an outcome of their decisions

-Utility
-Satisfaction
-Utility is not necessarily the same as usefulness
-Utility is highly subjective. One consumer canreceive a totally different amount of satisfaction from the same decision
-Because utility is highly subjective, it is difficult to quantify

-Total Utility (of some good)
-The maximum amount...