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Complete Solution Manual of Principles of Economics, 7th Edition By Mankiw

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  • ISBN-10 ‏ : ‎ 128516587X
  • ISBN-13 ‏ : ‎ 978-1285165875

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Complete Solution Manual of Principles of Economics, 7th Edition By Mankiw

WHAT’S NEW IN THE SEVENTH EDITION:

There is a new In the News feature on “The Invisible Hand Can Park Your Car.”

 

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

 the link between buyers’ willingness to pay for a good and the demand curve.

 how to define and measure consumer surplus.

 the link between sellers’ costs of producing a good and the supply curve.

 how to define and measure producer surplus.

 that the equilibrium of supply and demand maximizes total surplus in a market.

 

CONTEXT AND PURPOSE:

Chapter 7 is the first chapter in a three-chapter sequence on welfare economics and market efficiency. Chapter 7 employs the supply and demand model to develop consumer surplus and producer surplus as a measure of welfare and market efficiency. These concepts are then utilized in Chapters 8 and 9 to determine the winners and losers from taxation and restrictions on international trade.
The purpose of Chapter 7 is to develop welfare economics—the study of how the allocation of resources affects economic well-being. Chapters 4 through 6 employed supply and demand in a positive framework, which focused on the question, “What is the equilibrium price and quantity in a market?” This chapter now addresses the normative question, “Is the equilibrium price and quantity in a market the best possible solution to the resource allocation problem, or is it simply the price and quantity that balance supply and demand?” Students will discover that under most circumstances the equilibrium price and quantity is also the one that maximizes welfare.

 

KEY POINTS:

• Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price.

• Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.

• An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient. Policymakers are often concerned with the efficiency, as well as the equality, of economic outcomes.

• The equilibrium of supply and demand maximizes the sum of consumer and producer surplus. That is, the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently.

• Markets do not allocate resources efficiently in the presence of market failures such as market power or externalities.

CHAPTER OUTLINE:

I. Definition of welfare economics: the study of how the allocation of resources affects economic well-being.

 

II. Consumer Surplus

A. Willingness to Pay

1. Definition of willingness to pay: the maximum amount that a buyer will pay for a good.

2. Example: You are auctioning a mint-condition recording of Elvis Presley’s first album. Four buyers show up. Their willingness to pay is as follows:

 

 

Buyer Willingness to Pay
John $100
Paul $80
George $70
Ringo $50

If the bidding goes to slightly higher than $80, all buyers drop out except for John. Because John is willing to pay more than he has to for the album, he derives some benefit from participating in the market.

3. Definition of consumer surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

4. Note that if you had more than one copy of the album, the price in the auction would end up being lower (a little over $70 in the case of two albums) and both John and Paul would gain consumer surplus.

 

B. Using the Demand Curve to Measure Consumer Surplus

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