Transcript Macro Connections Seminar Subnational Productive

Principles of Microeconomics
09.Welfare and Market Efficiency*
Juan Pablo Chauvin
August 4, 2011
* Slide content principally sourced from N. Gregory Mankiw “Principles of Economics” Premium PowePoint
Contents
1. Review of previous lecture
2. An auction
3. Prices and consumer surplus
1. Review
Taxes
1.
•
•
2.
•
3.
•
•
What shifts?
If imposed on buyers, it is equivalent to a decrease in
income, shifts the demand curve left
If imposed on sellers, it is equivalent to an increase
in input costs, shifts the supply curve left
What is the size of the shift?
The amount of the tax
Tax incidence (who pays for the tax burden)
Whether the tax is charged to the producers or to the
sellers is irrelevant – the tax incidence is the same in both
cases
What matters is the elasticity of Supply and Demand
•
If Supply is more inelastic, the larger share of the burden
falls on the sellers.
•
If Demand is more inelastic, the larger share of the burden
falls on the buyers
Willingness to pay and CS
P
Flea’s WTP
$350
$300
•
Anthony’s WTP
Willingness to Pay (WTP):
the maximum price a buyer
is willing to pay for a given
good.
• At any Q, the height of
the Demand Curve is the
WTP of the marginal
buyer.
$250
$200
$150
$100
$50
Consumer Surplus (CS): is
the amount a buyer is
willing to pay minus the
amount the buyer actually
pays.
$0
• To get the market CS you
add-up the individual CS.
•
0
1
2
3
4
Costs and PS
P
•
$40
Chrissy’s
cost
$30
• At any Q, the height of
the Supply Curve is the
cost of the marginal
seller.
Janet’s
cost
$20
•
Jack’s cost
$10
Q
$0
0
1
2
3
Cost is the value of
everything a seller must give
up to produce a good (i.e.,
opportunity cost).
Producer Surplus (PS): is
the amount a seller
is paid for a good
minus the seller’s cost
• To get the market PS you
add-up the individual PS.
2. An auction
Product: Hand-made picture frames
Rules
•
There is 6 buyers and 7 sellers in this
classroom
•
Buyers’ goal is to get as many picture
frames as they can
•
Sellers’ goal is to sell as many picture
frames as they can
•
The instructor will serve as the
auctioneer
•
Each buyer at a time makes an offer
price (e.g. “I pay $ XX per picture
frame”).
•
The sellers that wish to sell at that
price make it known and close the
transaction.
•
The auction may have up to 6 rounds.
The Buyers’ WTP and the
Demand Schedule
Buyer
Rosalia
Seeye
Mehnaz
Rachel
Monica
Ellen
WTP
20
18
16
14
12
10
Price
$ 20.01 and up
18.01 - 20
16.01 - 18
14.01 - 16
12.01 - 14
10.01 - 12
0.00 - 10
Who buys
Nobody
Rosalia
Rosalia, Seeye
Rosalia, Seeye,
Mehnaz
Rosalia, Seeye,
Mehnaz, Rachel
Rosalia, Seeye,
Mehnaz, Rachel,
Monica
Rosalia, Seeye,
Mehnaz, Rachel,
Monica, Ellen
QD
0
1
2
3
4
5
6
Demand Schedule and
Demand Curve
P
Price
$ 20.01 and up
18.01 - 20
16.01 - 18
14.01 - 16
12.01 - 14
10.01 - 12
0.00 - 10
D
Q
QD
0
1
2
3
4
5
6
The Sellers’ costs and the
Supply Schedule
Price
Seller
Kirk
Golib
Rebeca
Chandrika
Elisa
Marina
Valery
Cost
6
8
10
12
14
16
18
$ 0 – 5.99
6 – 7.99
8 – 9.99
10 – 11.99
12 – 13.99
14 – 15.99
16 – 17.99
18.00 and
up
Who sells (write
names)
Nobody
Kirk
Kirk, Golib
Kirk, Golib, Rebeca
Kirk, Golib, Rebeca,
Chandrika
Kirk, Golib, Rebeca,
Chandrika, Elisa
Kirk, Golib, Rebeca,
Chandrika, Elisa,
Marina
Kirk, Golib, Rebeca,
Chandrika, Elisa,
Marina, Valery
QS
0
1
2
3
4
5
6
7
Supply Schedule and Supply
Curve
P
S
Price
$ 0 – 5.99
6 – 7.99
8 – 9.99
10 – 11.99
12 – 13.99
14 – 15.99
16 – 17.99
18.00 and up
Q
QS
0
1
2
3
4
5
6
7
Equilibrium
P
Equilibrium Q =
4 picture frames
S
Equilibrium
price range =
from $12.01 to
$13.99
P*
D
Q*
Q
3. Prices and Consumer
Surplus
Student’s Turn:
What is the CS at Price $13?
P
S
P*
D
Q*
Q
The CS at Price $13
P
S
Rosalia: 20 - 13 = 7
Seeye: 18 – 13 = 5
Mehnaz: 16 – 13 = 3
Rachel: 14 – 13 = 1
P*
Total CS = 16
D
Q*
Q
CS with Lots of Buyers & a Smooth D Curve
Price
per pair
At Q = 5(thousand),
the marginal buyer is
willing to pay $50 for
pair of shoes.
Suppose P = $30.
Then his consumer
surplus = $20.
P
The demand for shoes
$ 60
50
40
30
1000s of pairs
of shoes
20
10
D
0
0
5 10 15 20 25 30
Q
Calculating CS with a Smooth D Curve
CS is the area
P
between P and the D
$ 60
curve, from 0 to Q.
Recall: Area of
a triangle equals
½ x base x height
Height =
$60 – 30 = $30.
So,
CS = ½ x 15 x $30
= $225.
The demand for shoes
50
h
40
30
20
10
D
0
0
5 10 15 20 25 30
Q
How a higher price reduces CS
in our example…
P
S
In the Price raises
from $13 to $15,
total CS decreases
from $16 to $ 9.
P*2
P*1
From the $7 loss
in CS:
• $ 6 are because
each of the 3 buyers
remaining pays $2
more per frame.
• $ 1 is because one
buyer left the market
D
Q*
Q
How a Higher Price Reduces CS in
a smooth Demand Curve
P
If P rises to $40,
CS = ½ x 10 x $20
= $100.
60
Two reasons for the
fall in CS.
40
50
1. Fall in CS
due to buyers
leaving market
30
2. Fall in CS due to
remaining buyers
paying higher P
20
10
D
0
0
5 10 15 20 25 30
Q
STUDENTS’ TURN:
Consumer surplus
demand curve
P
50
$ 45
A. Find marginal buyer’s
40
WTP at
Q = 10.
35
B. Find CS for
30
P = $30.
25
Suppose P falls to $20.
How much will CS increase due 20
to…
15
C. buyers entering
10
the market
5
D. existing buyers paying lower
price
0
0
5
10
15
20
Q
25
Answers
A. At Q = 10, marginal buyer’s
WTP is $30.
B. CS = ½ x 10 x $10
= $50
P falls to $20.
C. CS for the
additional buyers
= ½ x 10 x $10 = $50
D. Increase in CS
on initial 10 units
= 10 x $10 = $100
demand curve
P
50
$ 45
40
35
30
25
20
15
10
5
0
0
5
10
15
20
Q
25
Principles of Microeconomics
09. Market Efficiency and Welfare*
Juan Pablo Chauvin
August 4, 2011
* Slide content principally sourced from N. Gregory Mankiw “Principles of Economics” Premium PowePoint