Chapter 7

Chapter 7 switches the view on supply and demand from positive to normative. In other words, where it is and where is should be. Consumers have an amount they are willing to pay, which is called willingness to pay. How does consumer surplus not apply to drug addicts, after all if they receive drugs for less money than they wanted to spend, it is still a consumer surplus? On the other hand buyers have a minimum price they are willing to receive, known as the cost. If a buyer spends less than intended, it is called a producer surplus. A decrease in the price of a good increases consumer surplus, while an increase in the price of a good causes producer surplus to rise. Total surplus is the addition of both consumer surplus and producer surplus. For both the demand and supply curve, an increase in inelasticity would mean an increase in surplus, respectively to each one right? So does that mean for inelastic goods, depending on the price, both the consumer and producer are better off than an elastic good? As learned in Chapter 4, the only place for the market to be balanced is at the equilibrium. To the left of the equilibrium, the value of the product is higher to buyers because it is cheaper, while the cost to sellers is below their necessary cost. To the right of the equilibrium, the value to the buyers is less due to the higher price, while the sellers is higher.