Transcript Document

1. Demand
Willingness to Pay (WTP)
A buyer’s willingness to pay for a good is the maximum
amount the buyer will pay for that good.
WTP measures how much the buyer values the good.
name
Flea
WTP
Example:
4 buyers’ WTP for an iPod
$300
Anthony
250
Chad
175
John
125
1
WTP and the Demand Curve
Q: If price of iPod is $200, who will buy an iPod, and
what is quantity demanded?
A: Flea & Anthony will buy an iPod,
Chad & John will not.
name
Flea
WTP
$300
Anthony
250
Chad
175
John
125
2
Hence, Qd = __
when P = $200.
2
WTP and the Demand Curve
Derive the
demand
schedule:
name
Flea
who buys
Qd
$301 & up nobody
0
WTP
251 – 300 Flea
1
$300
176 – 250 Anthony, Flea
2
Chad, Anthony,
126 – 175
Flea
3
John, Chad,
0 – 125
Anthony, Flea
4
Anthony
250
Chad
175
John
P (price
of iPod)
125
3
WTP and the Demand Curve
P
$350
$300
Qd=0
P
Qd
$301 & up
0
251 – 300
1
176 – 250
2
126 – 175
3
0 – 125
4
Qd=1
$250
$200
Qd=2
$175
Qd=3
$150
$125
$100
$50
Qd=4
$0
Q
0
1
2
3
4
4
About the Staircase Shape…
P
This D curve looks like a staircase
with 4 steps.
$350
$300
If there were a huge # of buyers,
as in a competitive market,
$250
$200
there would be a huge #
of very tiny steps,
$150
and it would look
more like a smooth
curve.
$100
$50
$0
Q
0
1
2
3
4
5
2. Supply
Cost and the Supply Curve
• Cost is the value of everything a seller must give up to
produce a good (i.e., opportunity cost).
• Includes cost of all resources used to produce good,
including value of the seller’s time.
• Example: Costs of 3 sellers in the lawn-cutting
business.
A
seller
will
only
produce
and
name cost
sell the good if the price
Angelo
$10
exceeds his/her cost.
Hunter
20
Hence, cost is a measure of
Kitty
35
willingness to sell.
6
Cost and the Supply Curve
Derive the supply schedule
from the cost data:
name
P
Qs
$0 – 9
0
10 – 19
1
20 – 34
2
35 & up
3
cost
Angelo
$10
Hunter
20
Kitty
35
7
Cost and the Supply Curve
P
$40
$35
$30
$20
$10
$0
P
Qs
$0 – 9
0
10 – 19
1
20 – 34
2
35 & up
3
Q
0
1
2
3
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3. Welfare measures—CS and PS
(1) Consumer Surplus (CS)
Consumer surplus is the amount a buyer is willing to
pay minus the buyer actually pays.
name
Flea
WTP
Suppose P = $260.
$300
Flea’s CS = $300 – 260 = $40
__.
Anthony
250
Chad
175
The others get no CS because they
do not buy an iPod at this price.
John
125
40 .
Total CS = $___
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CS and the Demand Curve
P
P = $260
Flea’s WTP
$350
$300
Flea’s CS =
$300 – 260 = $40
$250
$200
Total CS = $40
$150
$100
$50
$0
Q
0
1
2
3
4
10
CS and the Demand Curve
P
Flea’s WTP
$350
$300
Anthony’s WTP
Instead, suppose
P = $220
Flea’s CS =
$250
$200
$300 – 220 = $80
$150
$250 – 220 = $30
$100
$50
Total CS = $110
Anthony’s CS =
$0
Q
0
1
2
3
4
11
CS and the Demand Curve
P
The lesson:
Total CS equals
the area below
the demand curve
& above the price.
$350
$300
$250
$200
$150
$100
$50
$0
Q
0
1
2
3
4
12
CS with Lots of Buyers & a Smooth D Curve
Price per pair
Q: P = $30, CS=?
P
The Demand for Shoes
$ 60
50
A: CS is the area
h
below the D curve
40
and above the P.
30
Recall: area of
20
a triangle equals
10
½ x base x height
0
So, CS=½ x 15 x $30
= _____
1000s of pairs
of shoes
D
Q
0
5 10 15 20 25 30
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(2) Producer Surplus
P
$40
Producer surplus (PS):
the amount a seller
is paid for a good
minus the seller’s cost.
$30
$20
$10
$0
Q
0
1
2
3
14
Producer Surplus and the S Curve
P
Suppose P = $25
$40
Kitty’s
cost
$30
$25
Hunter’s
cost
$20
Angelo’s cost
$10
$0
Q
0
1
2
3
Angelo’s PS = $15
Hunter’s PS = $5
Total PS = $20
Total PS equals the area
below the price and
above the supply curve.
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PS with Lots of Sellers & a Smooth S Curve
Price per pair
Q: P=$40, PS=?
A: PS is the area below
the P and above the S
curve.
The height of this
triangle is
$40 – 15 = $25.
P
The supply of shoes
60
S
50
40
30
h
20
x 25 x $25
So,PS=½
_____________
= $312.5
$15
1000s of pairs
of shoes
10
Q
0
0
5 10 15 20 25 30
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4. Profit
profit per unit
= P – ATC
= $10 – $6
= $4
Costs and
Revenue
Total profit = TR-TC
=P
________________
x Q – ATC x Q
= $10
_________________
x 50 - $6 x 50
= _____
$200
MC
P = $10
profit
MR
ATC
$6
Total profit
= (P – ATC) x Q
= $4 x 50
= $200
Greg Mankiw: CHAPTER 14
50
FIRMS IN COMPETITIVE MARKETS
Q
17