Chapter 7. Consumers, Producers, and the Efficiency of Market


Objectives

  • What is consumer surplus? How is it related to the demand curve?
  • What is producer surplus? How is it related to the supply curve?
  • Do markets produce a desirable allocation of resources? Or could the market outcome be improved upon?




Introduction: What does it mean by "willingness-to-pay" in real life?

WATCH THIS VIDEO AND FIND OUT! :D





This is like.... Rachel wants to buy a new iPod. She wanted it ever since she was 10 years old. She is willing to pay $400 MAX! NO MORE!

Kristie wants to buy a new iPod too, because she does not like her old one anymore. She will buy a new iPod only if it is under $300.
external image June%2021st%20-%20Portable%20Music14.jpg

Then they find out that Apple Company sells it for $350.

Kristie: Whatever. I can live with my old one. :(

Rachel: YES! It's under $400! Finally I get a new iPod! :) :) :)



Do you get it ?



TOPIC 1

Welfare Economics
  • The study of how the allocation of resources affects economic well-being
  • Allocation of Resources
    • How much each good is produced
    • Which producers produce it
    • Which consumers consume it

Consumer Surplus.png
  • Willingness to Pay: the maximum amount that a buyer will pay for a good
  • Consumer Surplus: (a buyer's willingness to pay) - (the amount the buyer actually pays)
  • The price given by the demand curve reflects the willingness to pay of the marginal buyer.
  • The area below the demand curve is consumer surplus













.pngWhat Does Consumer Surplus Measure?

  • Consumer surplus, the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it
  • Consumer surplus is a good measure of economic well-being if policymakers want to respect the preferences of buyers
  • Economists normally presume that buyers are rational when they make decisions and that their preferences should be respected








Producer Surplus.png

  • Measures economic welfare from the seller’s side
  • Cost and Willingness to Sell
    • Each seller is willing to take the job if the price they receive exceeds their cost of doing the work
    • Cost – seller’s opportunity cost (value of everything a seller must give up to produce a good, including time)
    • Cost is the measure of seller’s willingness to sell the service
    • Producer surplus – amount a seller is paid for a good minus the seller’s cost
    • It measures the benefit to sellers participating in a market




  • Using the Supply Curve to Measure Producer Surplus
    • Just as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve
    • Height of supply curve is related to seller’s cost
    • At any quantity, the price given by the supply curve shows the cost of the marginal seller, the seller who would leave the market first if the price were any lower
    • The area below the price and above the supply curve measures the producer surplus in a market



Market Efficiency

  • The Benevolent Social Planner
    • Economic well-being: Total surplus
    • Total Surplus = Consumer Surplus + Producer Surplus
    • Total Surplus = (Value to Buyers - Amount Paid by Buyers) + (Amount Received by Sellers - Costs of Sellers)
    • Total Surplus = Value to Buyers - Costs of Sellers
  • Efficiency: property of a resource allocation of maximizing the total surplus received by all members of society
  • Equity: the fairness of the distribution of well-being among the various buyers and sellers




KEY TERMS

  • Willingness to Pay: the maximum amount that a buyer will pay for a good
  • Welfare Economics: The study of how the allocation of resources affects economic well-being
  • Consumer Surplus: (a buyer's willingness to pay) - (the amount the buyer actually pays)
  • Cost – seller’s opportunity cost (value of everything a seller must give up to produce a good, including time)
  • Producer surplus – amount a seller is paid for a good minus the seller’s cost
  • Efficiency: property of a resource allocation of maximizing the total surplus received by all members of society
  • Equity: the fairness of the distribution of well-being among the various buyers and sellers


Bib: home.manhattan.edu/~fiona.maclachlan/ppt/micro/micro_ch7.ppt
http://f00.inventorspot.com/images/June%2021st%20-%20Portable%20Music14.jpg