Transcript Spring 2016

Consumers’, Producers’ &
Net Social Surplus
Lecture 8
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 22, 2017
Sad News in the World of
Economics

Kenneth Arrow, NobelWinning Economist Whose
Influence Spanned
Decades, Dies at 95
–

https://www.nytimes.com/2017/02/21/
business/economy/kenneth-arrowdead-nobel-laureate-ineconomics.html?rref=collection%2Fse
ctioncollection%2Fobituaries&action=
click&contentCollection=obituaries&re
gion=rank&module=package&version
=highlights&contentPlacement=2&pgt
ype=sectionfront&_r=0
Kenneth J. Arrow, one of the
most brilliant economic minds of
the 20th century and, at 51, the
youngest economist ever to win a
Nobel, died on Tuesday at his
home in Palo Alto, Calif. He was
95.
EPI of a Per Unit Commodity
Tax
PD
Price
tax
Supply
Demand
Quantity
PS
Comments On Our Market Model
So Far...
 Demand
and Supply
 Equilibrium
 Comparative Statics
 Floors
 Ceilings
 Quotas
 Taxes
Surplus Measures:
Consumers’ & Producers’ & Net Social
 Goal:
to measure the
gains from trade in $...
– and more
 Three
concepts to
introduce:
– Consumers’ Surplus (CS)
– Producers’ Surplus (PS)
– Net Social Surplus (NSS)
This Old House




Old address: 133 Tompkins St.
New address: 132 Tompkins St.
Problem: We bought the new
house before selling the old one.
So... suppose...
– Our minimum
selling price = $55,000.
– Potential buyer Abe: His maximum
buying price = $45,000.
– So, no deal with Abe.
Selling our OLD House







Suppose, a potential (and last) buyer Betty.
Her maximum price = $95,000.
Remember: Our minimum selling price = $55,000.
Trade should occur!
Net social surplus on trade = $40,000
Division of surplus to the Wissink’s and to Betty depends on the
strike price - what we sell the house for.
Suppose we sold it for $90,000.
– HA!


– Consumer’s surplus=$5,000
– Producer’s surplus=$35,000.
What did we sell it for?
Don’t ask!
Demand Price, Marginal Benefit
& Total Benefit
Price

Suppose QD = 40 - P
40
P*=17
Demand
Q*=23
40
Quantity
Consumers’ Surplus (CS) when
QD=40-P  PD=40-P and P*=17 Q*=23
Price
40

CS on 1st unit:

CS on 2nd unit:

CS on 23rd unit:

CS on Q*=23 units:
P*=17
Demand
Q*=23
40
Quantity
i>clicker question
Suppose Frannie’s demand price (i.e. what she is willing to pay) is as follows: $3 for the first
can of juice, $2 for the second, $1 for the third and $0.50 for the fourth. Suppose a can of
juice sells for $0.75. How much consumer’s surplus will Frannie get from her juice
consumption?
A. $6.50
B. $6.00
C. $4.00
D. $3.75
E. $0
Supply Price, $Marginal Cost and
$Variable Cost

Price
Suppose QS = 6+P  PS = -6 + Q
Supply
P*=17
6
Q*=23
Quantity
Producers’ Surplus (PS) when
QS=6+P PS=-6+Q and P*=17 Q*=23
Price

PS on 1st unit:

PS on 7th unit:

PS on 23rd unit:

PS on Q*=23 units:
Supply
P*=17
6
Q*=23
Quantity
i>clicker question
Suppose Butch Sunkissed’s supply price for juice (i.e. what he is willing to sell for) is as
follows: $0.25 for the first can of juice, $0.30 for the second, $0.60 for the third and $1.20
for the fourth. Suppose a can of juice sells for $0.75. How much producer’s surplus will
Butch get from his juice sales?
A. $0.05
B. $2.25
C. $1.15
D. $1.10
E. $0.65
Net Social Surplus (NSS)
CS & PS
$

Market equilibrium: P* & Q*

$CS = $TB - $TE
–
–
–
–
C
Supply=MC

P*
Demand=MB
O E
Q*
$PS = $TR - $VC
–
–
–
–
A
Quantity

$TB = area OCAQ*
$TE = area OP*AQ*
$CS = area P*CA
$CS=area under demand and
above price demanders pay
$TR = area OP*AQ*
$VC =area OEAQ*
$PS = area OP*AE
$PS=area under price suppliers
receive and above supply
$NSS = $TB - $VC
– $NSS = area OCAE
– area between demand and
supply
Reprise of Frannie & Butch from
i>clicker Qs with P*=$0.75
P*=$0.75 P*=$0.75
Juice
cans
$MBFran
$MCButch
1st
$3
$0.25
2nd
$2
$0.30
3rd
$1
$0.60
4th
$0.50
$1.20
Trade?
On Total
Traded
NSS
CS
PS
Market Equilibrium & Efficiency


Suppose that social and private
valuations of marginal benefits
and marginal costs equal each
other.
Then at a market equilibrium, you
get what economists call
“efficiency”.
– aka Pareto efficiency
– aka allocative efficiency
– That is, NSS is maximized at the
market equilibrium.


GOOD NEWS result for markets!
Now, suppose “something” keeps
us away from Q*.
– The market is not efficient.
– What is the “cost” of that?
– Dead Weight Loss
$
Supply=MC
C
P*
A
Demand=MB
E
O
Q*
Quantity
i>clicker question
Consider demand and supply in the market for unskilled labor. Suppose a binding minimum wage is
imposed. Which one of the following is false when we compare the before and after situation?
A. Consumers’ Surplus under the minimum wage is lower.
B. Net Social Surplus under the minimum wage is higher.
C. There will be surplus labor under the minimum wage.
D. Producers’ Surplus may be higher or lower under the minimum wage.
$wage
Before
S
NSS
CS
PS
D
Labor
After
Why Commodity Taxes are
Inefficient
Price
Supply
Demand
Quantity
Marshall’s Diamond Water Paradox Resolved
$P diamonds
$P water
Q diamonds
Q water