Chapter+7+(Consumers,+Producers,+and+the+Efficiency+of+Markets)

===**Consumers, Producers, and the Efficiency of Markets** ===

Lower price raises consumer surplus!

How?

As consumers, we want to pay less for anything we buy, which explains why there is a raise in consumer surplus.

What does consumer surplus measure?

The concept of consumer surplus is to make judgements about the desirability of market outcomes.

Cost: the value of everything a seller must give up to produce a good.

The cost is the concept of //willingness to buy// but for the producers. However not all producers want to sell by the cost. Most producers has their //willingness to sell// price.

The producer surplus is the amount a seller is paid for a good minus the seller's cost of providing it. (amount recieved by sellers) - (cost to sellers) = Producer surplus

The producer surplus has very similar concept as the consumer surplus! Just as the consumer surplus is closely related to the demand curve, the producer surplus is related to the supply curve. Just as the the lower price raises consumer surplus, it also creates more producer surplus.

Here is the graph to clarify all the boring lecture:



Market Efficiency The benevolent social planner:

To evaluate market outcomes, we need a hypothetical character called the benevolent social planner. The benevolent social planner is all-knowing, all-powerful, well-intentioned dictator. The planner wants to maximize the economic well-being of everyone in the society.

But what is the economic well-being?

The economic well being is the total surplus. The total surplus is consumer surplus and producer surplus. The total surplus = (value to buyers - amount paid by buyers) + (amount received by sellers - cost to sellers) The total surplus = (value to buyers) - (cost to sellers)

When the resources maximized the total surplus, we say the allocation exhibits efficiency. Although the efficiency is important, the benevolent social planner may also care about equity, the fairness of the distribution of well being among the members of society. Sometimes, equity does not bring efficiency. In this case, it may be good for the people, but not too good for the economy. The graph above has the maximum of total surplus, which means that the amrket is efficient. To maximize the total surplus, the social planner would choose the quantity where the supply and demand curves intersect, the equilibrium.

Market do not allocate resources efficiently in the presence of market failures such as market power or externalities.

 Consumer Surplus
 * //Welfare economics: the study of how the allocation of resources affects the economy//



When you calculate the consumer surplus, you subtract the actual money that buyers paid from the willingness to pay. Willingness to pay is the money that they are actually willing to pay for it if they have options. However some of the buyers won't buy products if the price of a product is higher than their willingness to pay. The buyers who leave the market if the price of a good is any higher than their willingness to pay is called "marginal buyers". Using the Demand Curve to Measure Consumer Surplus



As you can see, the consumer surplus is closely relate to the demand curve since the buyers are the ones who affect the demand curve. When you use a graph to measure the consumer surplus, you find the area of a square below the line and above the price is the consumer surplus.

media type="youtube" key="Io822YgRfJo" height="344" width="425"

Questions:

True or False:

1) Producer surplus brings efficiency in markets.

2) The invisible hand of market place leads buyers and sellers to allocate resources efficiently.

3) Policy makers are often concerned with the efficiency only.

4) Producer surplus can be computed by finding the area above the price and below the supply curve

ANS: 1.T 2.T 3.F 4.F

Sources:

http://ingrimayne.com/econ/optional/effic/EfficiencyMark.html http://en.wikipedia.org/wiki/Efficient_market_hypothesis http://www.investopedia.com/articles/02/101502.asp http://www.basiceconomics.info/efficiency-of-markets.php