25. Using a demand-supply diagram, explain and identify the following areas:consumer surplus, producer surplus, total surplus.

Consumer surplus – is the benefit that buyers receive from participating in a market.

Consumer surplus = Value to buyers - Amount paid by buyers

Producer surplus is the benefit that sellers receive.

Similarly, we define producer surplus as

Producer surplus = Amount received by sellers - Cost to sellers.

When we add consumer and producer surplus together, we obtain

Total surplus = (Value to buyers - Amount paid by buyers) + (Amount received by sellers - Cost to sellers).

The amount paid by buyers equals the amount received by sellers, so the middle two terms in this expression cancel each other. As a result, we can write total surplus as Total surplus = Value to buyers + Cost to sellers.

Total surplus in a market is the total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods.

Figure 7 shows consumer and producer surplus when a market reaches the equilibrium of supply and demand. Recall that consumer surplus equals the area above the price and under the demand curve and producer surplus equals the area below the price and above the supply curve. Thus, the total area between the supply and demand curves up to the point of equilibrium represents the total surplus in this market.

26. The meaning of total surplus in a market, and describe why might it be a good measure of economic well-being. Using a demand-supply diagram, show the areas representing total surplus

See the 25 question.

Total surplus in a market is the total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods.

Total surplus is the sum of consumer surplus and producer surplus. It is measured as the area between the demand curve and the supply curve, from the origin to the quantity sold. It might be a good measure of economic well-being because it measures the total benefit to buyers and sellers from participating in a market.

27. Name two types of market failure. Explain why each may cause market outcomes to be inefficient

Market power and externalities are examples of a general phenomenon called market failure—the inability of some unregulated markets to allocate resources efficiently. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. Microeconomists devote much effort to studying when market failure is likely and what sorts of policies are best at correcting market failures.

Market power – ability to influence prices. Market power can cause markets to be inefficient because it keeps the price and quantity away from the equilibrium of supply and demand.

The use of agricultural pesticides, for instance, affects not only the manufacturers who make them and the farmers who use them, but many others who breathe air or drink water that has been polluted with these pesticides. Such side effects, called externalities, cause welfare in a market to depend on more than just the value to the buyers and the cost to the sellers. Because buyers and sellers do not consider these side effects when deciding how much to consume and produce, the equilibrium in a market can be inefficient from the standpoint of society as a whole.