Step+7.+Consumers,+Producers,+and+the+Efficiency+of+Markets-+Clair

CHAPTER 7 - CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS - welfare economics - willingnes to pay - consumer surplus - cost - producer surplus - efficiency - equity
 * Key terms

- what is consumer surplus and how can it be computed - what is producer surplus and how can it be computed - what is efficient? what is equitable - how do you maximize the sum of consumer and producer surplus - when do markets do not allocate resources efficiently?
 * What we will learn:

__ CONSUMER SURPLUS __ · Willingness to pay o ** Willingness to pay ** – the maximum amount that a buyer will pay for a good (measures how much the buyer values the goods) o ** Consumer surplus ** – the amount a buyer is willing to pay for a good minus the buyer actually pays for it (D – P) · Using the Demand Curve to Measure Consumer Surplus o In the demand curve, the price given at any quantity shows the willingness to pay of the //marginal// buyer (the buyer who would leave the market first if the price were any higher) o The area below the demand curve and above the price measures the consumer surplus in a market · How a Lower Price Raises Consumer Surplus o When Price lowers, **additional consumer surplus to initial consumers** and **consumer surplus to new consumers are newly added** o The original consumer surplus is called the **initial consumer surplus** · What Does Consumer Surplus Measures? o Measures the benefit that buyers receive from a good //as the buyers themselves perceive it//. o In most markets, consumer surplus reflects economic well-being § Exception: when the policymakers do not respect the preferences that drive buyer behavior like drugs __ PRODUCER SURPLUS __ · Cost and the willingness to Sell o ** Cost ** – the value of everything a seller must give up to produce a good (measure of the seller’s willingness to sell) o ** Producer surplus ** – the amount a seller is paid for a good minus the seller’s cost of providing it · Using the Supply Curve to Measure Producer Surplus o The Height of the supply curve is related to the sellers’ costs – 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) o The area below the price and above the supply curve measures the producer surplus in a market · How a Higher price raises producer Surplus o When price rises, **additional producer surplus to initial producers** and **producer surplus to new producers are newly added** o The original producer surplus is called the **initial producer surplus.** __ MARKET EFFICIENCY __ · The Benevolent Social Planner o Possible ways to measure the economic well-being of a society § // Total surplus // =exhibits **efficiency**= the property of a resource allocation of maximizing the total surplus received by all members of society) · Consumer surplus = value to buyers – amount paid by buyers · Producer surplus = amount of received by sellers – cost to sellers  · Total surplus = value to buyers – cost to sellers  · Allocation is inefficient if a good is not being produced by the sellers with lowest cost  · Allocation is inefficient if a good is not being consumed by the buyers who value it most highly.  § ** Equity ** – the fairness of the distribution of well-being among the members of society  · Evaluating the Market Equilibrium o Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay o Free markets allocate the demand for goods to the sellers who can produce them at least cost o Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus (total surplus) § The total surplus – the sum of consumer and producer surplus – is the area between the supply and demand curves up to the equilibrium quantity o The equilibrium outcome is an efficient allocation of resources § At quantities less than equilibrium quantity, the value to buyers is greater than cost to sellers. · Increasing the quantity produced and consumed raises total surplus until the equilibrium pt. § At quantities larger than equilibrium quantity, the value to buyers is less than cost to sellers · Decreasing the quantity produced and consumed raises total surplus until the equilibrium point § Therefore, //Laissez faire// (free market/invisible hand), is good for efficiency (centrally planned economies never work well because the planner needs to know every willingness and cost) __ CONCLUSION: MARKET EFFICIENCY AND MARKET FAILURE __ · ** Market failure - ** competition in market is far from perfect in reality o ** Market power ** – the ability to control market price because of single buyer or single seller o ** Externalities ** – side effects like pollution that affect not only the participants, but the bystanders as well
 * __ TopicS __

CONCLUSION

Market efficiency is judged by the total surplus, as you can see from the chapter. And because total surplus equals consumer surplus plus producer surplus, the invisible hand guides the market so that both consumer and producer benefit as closely as possible.

=**__ sources __**=

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