1.When market is in Equilibrium, the Buyers are those with the__________ willingness to pay and the sellers are those with the __________ cost  a. highest, highest b. highest, lowest c. lowest,...

1.When market is in Equilibrium, the Buyers are those with the__________ willingness to pay and the sellers are those with the __________ cost 

a. highest, highest 
b. highest, lowest 
c. lowest, highest 
d. lowest lowest 


2. The cost of producing flat screen TVs has fallen over the past decade. Let's consider some implications:

a. draw a supply and demand diagram to show the effect of falling production costs on the price and quantity of flat screen tv's sold 
b. in your diagram show what happens to consumer surplus and producer surplus 
c. suppose the supply of flat screen TVs is very elastic. Who benefits most from falling production costs- consumers or producers of these TVs?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The answer to your first question is Option B.  In a market, the people who get to buy are the ones with the highest willingness to pay.  This is because buyers have to compete to buy goods.  Those who are willing to pay the highest price will win.  Conversely, sellers are those who are willing to sell for the lowest price.  Sellers have to compete to get the buyers’ business.  This means that sellers have to offer the lowest possible price in order to attract customers.

For your second question, your graph needs to show supply increasing (supply curve moving down and to the right.  When the cost of making a product drops, the supply of the product increases.  You will see that this will lower the price of the good and increase the quantity bought and sold.  As supply increases, (if demand stays constant) both the producer and consumer surplus will increase because the area of the triangle between the supply and demand curves and the y-axis of the graph increases.  If the supply is very elastic, the supply curve will be flatter.  As supply increases in this situation, the consumer surplus rises more than the producer surplus.

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