CHAPTER+7-+CONSUMERS,+PRODUCERS,+AND+THE+EFFICIENCY+OF+MARKETS

EFFICIENCY of MARKETS **
 * CONSUMERS ****, PRODUCERS, and the



BUYERS al ways want to pay less, and **SELLERS** always want to get paid more.

__Vocabulary __  __Concept #1 __: The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers.  __Vocabulary #2 __  __Concept #2: Willingness to Pay __  1)   <span style="FONT-SIZE: 11pt; COLOR: blue; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">If the price is exactly the same as the value he places on the album <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">, he would be equally happy buying it or keeping his money.  <span style="FONT-SIZE: 11pt; COLOR: green; mso-bidi-font-family: 바탕; mso-font-kerning: 0pt"> <span style="FONT-FAMILY: 바탕">2)    <span style="FONT-SIZE: 11pt; COLOR: blue; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Each buyer would be eager to buy the album <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> at a price less than his willingness to pay. <span style="FONT-SIZE: 11pt; COLOR: green; mso-bidi-font-family: 바탕; mso-font-kerning: 0pt"> <span style="FONT-FAMILY: 바탕"> 3)   <span style="FONT-SIZE: 11pt; COLOR: blue; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">The buyer would refuse to buy the album <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> at a price greater than his willingness to pay.  <span style="FONT-SIZE: 11pt; COLOR: green; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> __<span style="FONT-SIZE: 11pt; COLOR: red; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Conclusion __<span style="FONT-SIZE: 11pt; COLOR: red; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">: As long as the price is less than or equal to the buyer’s willingness to pay, the consumer wishes to buy the good. <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Example) Elvis Presley Album at an auction. <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Buyer Willingness to pay 1)  <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">John- $100   2)   <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Paul- $80 3)  <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">George- $70   4)   <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Ringo- $50 __**Demand Curve:**__ Using the previous example, <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> __ Demand Curve __ -  Using the demand schedule, we can plot a demand curve. -  At any quantity, price given shows the willingness to pay of the marginal buyer, the buyer who would leave the market first if the price were any higher. <span style="FONT-SIZE: 20pt; COLOR: #cc99ff; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> __<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Vocabulary #3 __ <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">How to measure C.S? <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">* The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. __ Consumer Surplus in this EXAMPLE __ - Suppose John is able to buy the Elvis album for $80 - Since he was willing to pay up to $100 for the album, he receives consumer surplus of $100- $80 = $20 - Suppose instead that there are two copies of the album on sale at a flea market for $80 each. - John receives consumer surplus of $100-$80=$20 and Paul receives consumer surplus of $80-$80=$0. - Total consumer surplus is $20. <span style="FONT-SIZE: 20pt; COLOR: #cc99ff; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> <span style="FONT-SIZE: 20pt; COLOR: #cc99ff; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> __ Decreasing Price: __ -  I ncreases the consumer surplus of consumers  that were already in the market, since they   now pay a lower price (this increase is area  BCFE). -  Results in consumer surplus for new buyers that were unwilling to buy the good at the old   price but are willing to buy at the new price  (this increase is area CFG). __ Vocabulary #4 __ How to measure P.S? * The amount a seller is paid for a good minus the seller’s cost of providing it. __ Vocabulary #5 __ -  includes the cost of inputs and value of time
 * <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Welfare Economics **<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">: the study of how the allocation of resources affects economic wellbeing.
 * <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Willingness to pay **<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">: the maximum amount that a buyer will pay for a good.
 * **<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Price ** || **<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Buyers ** || **<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Quantity ** ||
 * >$100 None 0 || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">None || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 ||
 * $81-$100 <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> || John <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">1 ||
 * $71-$80 <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">John, Paul || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">2 ||
 * $51-$70 <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">John, Paul, George || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">3 ||
 * $50 or less <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">John, Paul, George, Ringo || <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">4 ||
 * <span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Consumer Surplus **<span style="FONT-SIZE: 11pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">: measures the benefit to buyers of participating in a market.
 * Producer Surplus: **
 * Cost: ** the value of everything a seller must give up to produce a good (e.g. the opportunity cost of producing)

Example 2) Four people who are willing to paint a house.  - Each seller will only provide the service if the amount that they are paid is at least equal to their cost.  - For any given price, we can find out how many sellers are willing to provide the service. The resulting schedule is the **supply schedule**. __ Supply Schedule: __ <span style="FONT-SIZE: 20pt; COLOR: #cc99ff; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">
 * ** Seller ** || ** Cost ** ||
 * Mary || $900 ||
 * Frida || $800 ||
 * Georgia || $600 ||
 * Grandma || $500 ||
 * Price || Sellers || Quantity ||
 * 900+ || Mary, Frida, Georgia, Grandma || 4 ||
 * 800-900 || Frida, Georgia , Grandma || 3 ||
 * 600-800 || Georgia, Grandma || 2 ||
 * 500-600 || Grandma || 1 ||
 * <500 || None || ||

__ Increasing Price: __ -  Increases the producer surplus of producers that were already in the market, since they now receive a higher price (this increase in area BDEF). -  Results in producer surplus new sellers that were unwilling to sell the good at the old price but are willing to sell at the new price. (this increase is area BCD) -We will use total surplus as a measure of economic well-being. * ** total surplus = consumer surplus + producer surplus ** __<span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Vocabulary #6 __ ** Efficiency **<span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">: the property of a resource allocation of maximizing the total society. __<span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Vocabulary #7 __ ** Equity **<span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">: the fairness of the distribution of well-being among the members of society. <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: Arial"> -  <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Equity is an alternative criterion for evaluating the outcome of the market. <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold"> __<span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Evaluating the Market Equilibrium __ <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: Arial"> -  <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Markets allocate supply of goods to buyers, who value them most highly, as measured by willingness to pay. <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: Arial"> -  <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Free markets allocate demand for goods to the sellers who can produce them at lowest cost. <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold; mso-fareast-font-family: Arial"> -  <span style="FONT-SIZE: 11pt; COLOR: black; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-bidi-font-weight: bold">Social planner cannot increase total surplus by changing allocation of consumption between buyers or allocation of production between sellers. ** Can Planner Increase Welfare by Increasing/Reducing Quantity? **  - Below equilibrium quantity, the value of output to buyers **exceeds** cost to sells * Can increase surplus by increasing output. - Above equilibrium quantity, the value of output to output to sellers exceeds value to buyer. * Can increase surplus by decreasing output. ** Key point ** : From the market outcome, the social planner cannot increase economic wellbeing. Markets fail to maximize surplus (achieve efficiency) -  When producers have market power. <span style="FONT-SIZE: 11pt; FONT-FAMILY: Wingdings; mso-bidi-font-family: Wingdings; mso-font-kerning: 0pt; mso-fareast-font-family: Wingdings"> n  In this case, market will not reach equilibrium price/quantity.
 * Can the market outcome be altered so as to improve economic well-being? **

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