Transcript Econ Online Textbook Chapter 7 - mrski-apecon-2008

Chapter 7
Consumers, Producers, and the Efficiency of
Markets
Key Terms to Concern
Welfare Economics
Willingness to pay
Consumer Surplus
Cost
Producer Surplus
-Efficiency
-Equity
Welfare Economics
In this chapter we are going to learn about
Welfare Economics.
The study of distribution of resources
affect economic well-being.
Who are involved in the Welfare
Economy?
Buyers & Sellers
Pretty lucky
You decide to buy the newest pair of
Michael Jordan shoes in the market for
170$. However, the seller only sells it for
120$.
In this situation, 170$ is the willingness to
pay, and a consumer surplus is created.
Consumer surplus is created because the
buyer is benefiting 50$ (Willingness to paythe actual price)
YEAAAAAAAAA
Demand curve vs
Consumer surplus
A lower price raises the Consumer Surplus
Buyers always want to buy goods at the
cheapest price so they are better off.
How does the graph look like?
How is this graphed?
Consumer surplus= Willingness to pay - Actual Price
Price
In this Graph, Bobby’s willingness to pay is 40$, therefore his
Consumer surplus is $16. For Johnny, his willingness to pay is $24,
therefore his consumer surplus is $9. If the price of the album is only
$15, then there are 2 buyers Bobby and Johnny. So the the total
consumer surplus is $16+$9+$9=$34.
What do we learn from this?
The lower the price, the
higher the consumer
surplus
More
than 40$
$24 to
40$
15$ to
$24
10$ to
$15
Quantity
Buyers Demande
d
None
0
Bobby
1
Bobby,
Johnny
Bobby,
Johnny,
Billy
Bobby,
Johnny,
0$ to $10
Billy,
Eddy
2
3
4
Then what about
Producer surplus?
We learned that the lower the price, the
higher the consumer surplus (Consumer
Surplus= Willingness To Pay - Actual
Price)
Then what will raise producer surplus?
Key word - Cost
A cost is a seller’s willingness to buy.
Producer Surplus vs Supply curve
Price = $6
Price
Making a
Mega
Whopper
Supply
Therefore, the higher the price
the higher the producer surplus.
$9
8
6
5
Mr.Ski
’s producer
surplus ($1)
0
1
2
3
4
Quantity of Mega Whopper
In this case, only Mr.Ski’s is Willing To do the job at $6. However if the payment was $6 to $8, Mr.Bobby would be
willing to do the job. Therefore, the quantity supplied is 2. If the payment was $6 to $8 then the producer surplus
would be
producer surplus= $1+$2+$2=$5
Market Efficiency
What is Market Efficiency?
•
•
Is the allocation of resources determined by free markets in any
way wanted?
Evaluating the Market Equilibrium
• Things to remember
• Consumer Surplus- (Willingness to pay - Actual Price)
• Producer Surplus-(Amount received by sellers - cost to
sellers)
• Total Surplus= Consumer Surplus + Producer Surplus
Market Efficiency
Going back to chapter one the definition
for efficiency
*efficiency is when trying to get the most out of a
resource.
In this chapter efficiency is defined as the resource allocation of
maximizing the total surplus received by the consumers and producers
of the society.
Market Efficiency
However, a social planner should also
worry about “Equity” which is the fair
distribution among all the buyers and
sellers.
Consumer and Producer
Surplus in the Market
Equilibrium
• Three Insights Concerning Market
Outcomes
Price A
D
Supply
Consumer
surplus
ibrium
price
E
Producer
surplus
B
C
0
Equilibrium
quantity
Demand
• Free markets distribute the supply of
products to the demanders. Demanders
usually value at a high price
(Willingness to Pay).
• Free markets distribute the demand for
goods to the sellers so the sellers can
produce them at the (least cost).
• Free markets produce quantities of
products that maximizes the producer
and
consumer
surplus.
Quantity
The Efficiency of the
Equilibrium Quantity
Price
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
0
Value
to
buyers
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Value to buyers is less
than cost to sellers.
What i don’t get this graph...
In this graph the market equilibrium
market maximizes the Total Surplus.
Therefore, it is efficient.
Demand
Quantity
Because the market is efficient,
the social can leave the market
outcome.
The Efficiency of the
Equilibrium Quantity
What about Externalities?
We know that Externalities are created
when a market outcome affects an
individual than the sellers and buyers.
However, if sellers and buyers do not
concern about externalities when they
consume and produce, the free market
will be inefficient (Creating a market
failure.) We will learn more about
externalities in chapter 10.
Summary
Consumer Surplus-Buyers benefits from
participating in a market (Willingness to
pay - Actual Price) [The area below the
demand curve]
Producer Surplus- The suppliers benefits
from participating in a market. (Amount
received by sellers - cost to sellers) [The
area above the supply curve
Total Surplus= Consumer Surplus +
Producer Surplus
Summary
The equilibrium point maximizes the sum
of the Consumer Surplus and the Producer
Surplus.
Free Markets sometimes can be inefficient,
due to the presence of externalities.
Questions
The _________ of demand and supply
maximizes the sum of consumer and
producer surplus.
What are policy makers often concerned of?
Answer
1. Equilibrium
2. Efficiency, as well as the equity, of
economic outcomes.