Chapter+7+-+Consumers,+Producers,+and+the+Efficiency+of+Markets+CDJ

= Chapter 7: Consumers, Producers, and the Efficiency of Markets          = =    = =    = =    = =    =   *Willingness to Pay : the highest amount that the buyer will to pay for a certain good. This illustrates how much you value that good. If you think it's extremely valuable and important, then you're willingness to pay will be high. If you don't really think that the good is valuable then your willingness to pay for that good would be low.

For example, let's say that there is going to be a Jamiroquai concert held right here in Seoul. Now there is only one ticket left and there are 4 buyers who are interested in purchasing this ticket - Chaeri, Dayeon, Jina and Mr. Ski. Remember that each person values the ticket differently.

Let's say that Chaeri's willingness to pay for this last Jamiroquai ticket is $100, Dayeon's WTP is $80, Jina's WTP is $60 and Mr. Ski's WTP is $40. Clearly, Chaeri values the ticket the most because she is willing to pay at a higher expense. Okay so, the bidder (the ticket seller) finally calls out $70. At this point, only two people are in the bidding because the price of the ticket is higher than Jina and Mr. Ski's willingness to pay; thus, they dropped out of the bidding. Now only Chaeri and Dayeon remain because the market price is still below their WTP however, shortly after, the seller calls out the final cost which is $90. At this price, only Chaeri remains therefore she gets the last Jamiroquai ticket. Not only does she get to see the concert, she also receives Consumer Surplus of $10  **. Picture: http://ceenet.msue.msu.edu/home/director/newsletters/2007/january/image009.jpg** **   <span style="color: rgb(255, 0, 239);"><span style="color: rgb(178, 29, 237);"><span style="color: rgb(72, 62, 239);">  <span style="font-size: 140%; color: rgb(0, 0, 0); font-family: Arial,Helvetica,sans-serif;"> <span style="color: rgb(216, 14, 110);">__**How a Lower Price Raises Consumer Surplus**__ = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = However, in a market with many markets, these curves become <span style="font-size: 120%; color: rgb(195, 9, 9);">smoother curve, becoming linear demand curve.
 * Normally, the demand curve of the consumer surplus is a stair case when dealing with small number of buyers.

If there is a fall in price of a good, there will be an increase in consumer surplus; however, there are two parts to such increase. 1)** **<span style="font-size: 130%; font-family: 'Courier New',Courier,monospace; color: rgb(108, 16, 178);">Existing buyers ** **will pay the less of what they used to pay, creating consumer surplus 2) With a lower price,** **<span style="font-size: 130%; font-family: 'Courier New',Courier,monospace; color: rgb(255, 0, 210);">new buyers ** **will enter the market**

// <span style="font-size: 110%; color: rgb(22, 21, 172);">What Does Consumer Surplus Measure? // If you are a policymaker... you would respect the preferences of buyers in order to have an efficient measure of the consumer surplus. However, sometimes you would not respect such preference** in case of "drug addicts". = <span style="font-size: 140%; color: rgb(43, 20, 204);">   =

= <span style="font-size: 140%; color: rgb(43, 20, 204);">   =

<span style="font-size: 120%; font-family: 'Comic Sans MS',cursive; color: rgb(229, 87, 87);"> http://www.businesstrainingworks.com/images/Course%20Outline/32-Creativity-and-Thinking.gif = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = **<span style="color: rgb(0, 0, 255); font-size: 120%;">Consumer surplus ** **= value to buyers – amount paid by buyers**

The <span style="font-size: 120%; color: rgb(255, 0, 194);">demand curve reflects buyer’s <span style="font-size: 120%; color: rgb(190, 30, 30);">willingness to pay. So as you can see from the graph below, the <span style="font-size: 120%; color: rgb(112, 189, 235);">**area below the demand curve and above the price** determines the consumer surplus in the market. Thus the <span style="font-size: 120%; color: rgb(86, 27, 192);">differences between the willingness to pay and the market price is the consumer surplus.

http://www.stanford.edu/group/FRI/indonesia/courses/manuals/multimarket/Output/chapt1.html

**<span style="font-size: 140%; color: rgb(209, 71, 16);">Producer Surplus **
 * Producer surplus** **= amount seller is paid – seller's cost**

The <span style="font-size: 120%; color: rgb(209, 31, 239);">height of the supply curve reflects to the <span style="font-size: 120%; color: rgb(144, 19, 19);">sellers’ costs. By looking at the graph below, we can see that the <span style="font-size: 120%; color: rgb(151, 32, 32);"><span style="font-size: 120%; color: rgb(40, 164, 54);">area below the price and above the supply curve illustrates the producer surplus in a market

http://www.stanford.edu/group/FRI/indonesia/courses/manuals/multimarket/Output/chapt1.html

<span style="color: rgb(198, 88, 88);"> media type="file" key="apecon15 2.mp3"**<span style="color: rgb(198, 88, 88);"> Cost is measurement of how much the seller have to give up in order to produce a good?**
 * __<span style="font-size: 140%; color: rgb(198, 88, 88);">What is cost? __**

Similar to the concept of the Consumer surplus that have been mentioned above, when measuring the producer surplus, one should take in consider of the supply curve.

In other words, the <span style="font-size: 120%; color: rgb(230, 45, 178);">height of the supply curve relates to the <span style="font-size: 130%; color: rgb(70, 24, 124);">sellers' costs. Therefore, another way to measure the producer surplus in a market is to calculate the area **below** the price and **above** the supply curve. = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = **Total surplus** **= consumer surplus + producer surplus** = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = = <span style="font-size: 140%; color: rgb(43, 20, 204);">   = http://www.answers.com/topic/price-support

<span style="color: rgb(128, 0, 128); font-size: 140%;">Market Efficiency
Benevolent social planner tries to maximize the economic well-being by measuring the <span style="font-size: 130%; color: rgb(25, 64, 164);">total surplus. And total surplus is the <span style="color: rgb(245, 123, 56); font-size: 130%;">sum of consumer surplus and producer surplus. Thus, Consumer surplus and producer surplus allow economists to study the <span style="color: rgb(65, 163, 241);">welfare of buyers and sellers.

When resources are allocated that maximizes the total surplus, it is said to be <span style="font-size: 130%; color: rgb(10, 174, 28);"><span style="font-size: 130%; color: rgb(9, 123, 47);">efficien **t**. received by buyers and sellers.**
 * Efficiency : The allocation of resources maximizes the total surplus

So it is important to take in consider that it is efficient if goods are produced by sellers at<span style="font-size: 130%; color: rgb(0, 129, 255);"> lowest cost and consumed by buyers that value such good very <span style="font-size: 130%; color: rgb(246, 44, 44);">highly.

http://i.pbase.com/o6/59/662759/1/77819279.LyI7J6Rk.IMG_7839.jpg

However, one should also care about <span style="font-size: 140%; color: rgb(228, 47, 209);">equity. But the fact is, having equity in a market is // more difficult // than efficiency.
 * Equity : Fairness of the distribution of well-being among buyers and sellers.**

<span style="font-size: 140%; color: rgb(82, 247, 75);">Evaluating the Market Equilibrium Willingness to pay, least cost of production, maximum total surplus. **
 * When evaluating the **Market Equilibrium**, think of three words:

In other words, a market that reaches the ** equilibrium ** of supply and demand is said to be efficient. Even if value to buyers exceeds cost to sellers OR cost to sellers exceeds value to buyers, the market equilibrium will maximize the total surplus even if the market outcome was left alone, or laissez faire.

(Refer to the graph above about the third graph)

Take a look at the video that summarizes the consumer surplus & producer surplus: ** = <span style="font-size: 140%; color: rgb(43, 20, 204);">media type="youtube" key="Io822YgRfJo" height="344" width="425"   = http://www.youtube.com/watch?v=Io822YgRfJo
 * <span style="font-size: 120%; font-family: 'Comic Sans MS',cursive; color: rgb(229, 87, 87);">

Summary: **
 * <span style="font-size: 150%; color: rgb(138, 15, 15);">
 * Consumer surplus is calculated by subtracting the amount paid by buyers from value to buyers
 * Producer surplus is measured by subtracting seller's cost from the amount seller is paid
 * Combination of consumer surplus with producer surplus equals the total Surplus
 * There's always an conflict between efficiency and equity
 * Equity deals with fairness while efficiency deals with the allocation of resources that maximizes the combination between consumer surplus and producer surplus
 * When markets do not consider efficiency, it could lead to market failures (market power / externalities)

<span style="font-size: 150%; color: rgb(210, 25, 84);">Problems and Application Questions: 1. What is the definition of<span style="font-size: 140%; color: rgb(255, 0, 183);"> “Willingness to pay” in your own words? 2. If Mr. Ski is willing to pay** <span style="font-size: 120%; color: rgb(0, 7, 255);">$50 **for a computer, but the actual price of a computer is** <span style="font-size: 120%; color: rgb(28, 15, 204);">$100 **, would he still purchase the computer logically?
 * <span style="font-size: 120%; color: rgb(225, 100, 20);">

<span style="color: rgb(14, 175, 32); font-size: 120%;">Answers: 1. Answers may vary, but it should say something about the maximum amount that the buyers would pay for a product 2. No, because the actual price exceeds his willingness to pay, thus there will be no consumer surplus [Consumer surplus= willingness to pay-actual price]