Economy assignment
m21q8
ECON251_M1_Sp22_RogerAntoun_Chp4.pdf
ECON251
Demand and Supply Review
A competitive market is
a) a market in which there are many buyers and many sellers so that each has a negligible impact on price.
b) a market where consumers cannot freely interact with sellers.
c) a market where suppliers are under no government restrictions.
d) a market with many buyers but few sellers.
When we are studying the behavior of buyers, we are studying a) supply.
b) demand.
c) government regulation.
d) an entire market.
Which of the following would NOT be a determinant of demand? a) the price of related goods
b) income
c) tastes
d) the prices of the inputs used to produce the good
If a good is “normal,” then an increase in income will result in a. no change in the demand for the good. b. a decrease in the demand for the good. c. an increase in the demand for the good. d. a lower market price.
If the price of a substitute to good X increases, then a. the demand for good X will increase. b. the market price of good X will decrease. c. the demand for good X will decrease. d. the demand for good X will not change.
The movement from point A to point B on the graph would be caused by a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.
The movement from point A to point B on the graph would be caused by a. an increase in the price of the good.
b. a decrease in the price of the good.
c. an increase in technology.
d. an increase in input prices.
According to the graph, equilibrium price and quantity are a. $7, 20. b. $7, 60. c. $5, 40. d. $3, 60.
What happens at a price of $7? At price 3?
PRICE QUANTITY DEMANDED QUANTITY SUPPLIED
$10 10 100
$8 20 80
$6 30 60
$4 40 40
$2 50 20
In the table shown, the equilibrium price and quantity would be _______
In the table shown, if the price were $8, _________
• Suppose that the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?
• Suppose that the incomes of buyers in a particular market for a normal good declines and there is also a reduction in input prices. What would we expect to occur in this market?
• Suppose that demand decreases AND supply decreases. What would you expect to occur in the market for the good?
• A weaker demand together with a stronger supply would necessarily result in
Consumer and Producer Surplus
Chapter 4
What consumer surplus is and its relationship to the demand curve
What producer surplus is and its relationship to the supply curve
What total surplus is and how it can be used both to measure the gains from trade and to illustrate why markets work so well
WHAT YOU WILL LEARN IN THIS CHAPTER
Consumer Surplus and the Demand Curve
• A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.
• Individual consumer surplus is the net gain to an individual buyer from the purchase of a good.
It is equal to the difference between the buyer’s willingness to pay and the price paid.
$59
45
35
25
10
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D
$59
45
35
10
25
Aleisha
Brad
Claudia
Darren
Edwina
Price of book
Quantity of books
Potential buyers Willingness to pay
Aleisha
Brad
Claudia
Darren
Edwina
A consumer’s willingness to pay for a good is the maximum price at which
he or she would buy that good.
The Demand Curve for Used Textbooks
Willingness to Pay and Consumer Surplus
• Total consumer surplus is the sum of the individual consumer surpluses of all the buyers of a good.
• The term consumer surplus is often used to refer to both individual and total consumer surplus.
Price = $30
Aleisha’s consumer surplus: $59 − $30 = $29
Brad’s consumer surplus: $45 − $30 = $15
Claudia’s consumer surplus: $35 − $30 = $5
The total consumer surplus is given by the entire shaded area —
the sum of the individual consumer surpluses of Aleisha, Brad, and
Claudia — equal to $29 + $15 + $5 = $49.
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Aleisha
Brad
Claudia
Darren
D
Edwina
$59
45
35
30
10
25
Price of book
Quantity of books
Consumer Surplus in the Used Textbook Market
Consumer Surplus in the Used Textbook Market
The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand
curve but above that price.
D
Consumer surplus
1 million0
$500
Price of iPad
Quantity of iPads
Price = $500
Consumer Surplus
How Changing Prices Affect Consumer Surplus
• A fall in the price of a good increases consumer surplus through two channels:
1. a gain to consumers who would have bought at the original price
2. a gain to consumers who are persuaded to buy by the lower price
Darren’s consumer
surplus
Increase in Aleisha’s
consumer surplus
Increase in Brad’s
consumer surplus
Increase in Claude’s
consumer surplus
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D
$59
45
35
30
10
25
20
Aleisha
Brad
Claudia
Darren
Edwina
Price of book
Quantity of books
Original price = $30
New price = $20
Consumer Surplus and a Fall in the Price of Used Textbooks
Increase in consumer surplus to original buyers
1 million0 200,000
500
$2,000
Price of iPad
Quantity of iPads
Consumer surplus gained by new buyers
D
A Fall in the Market Price Increases Consumer Surplus
If a consumer is willing and able to pay $15.50 for a particular good but the price of the good is $16.00, then
A. the consumer would have consumer surplus of $0.50.
B. the consumer would not purchase the good and would not have any consumer surplus.
C. the consumer would increase his/her willingness and ability to pay by earning more.
D. the market must not be a perfectly competitive market.
If a consumer is willing and able to pay $200 for a particular good but only has to pay $140,
a. the consumer surplus is $60.
b. the consumer surplus is $140.
c. the consumer surplus is $200.
d. the consumer surplus is $340.
If you pay a price exactly equal to your willingness to pay, then A. your consumer surplus is $0.
B. your willingness to pay is less than your consumer surplus.
C. your consumer surplus is negative.
D. you place little value on the good.
This table refers to five possible buyers’ willingness to pay for Good Z.
Buyer Willingness to Pay
Cassie $8.50
Jamie 7.00
John 5.50
Jeremy 4.00
Sarah 3.50
• If the market price is $5.50, the consumer surplus in the market will be ___
• If the price of good Z is $6.90, who will purchase the good?
• When the price is P1, consumer surplus is _____
• At the higher price of P2, consumer surplus is ____
• What area represents consumer surplus when the price is P1? a. A
b. B
c. C
d. D
Producer Surplus and the Supply Curve
• A potential seller’s cost is the lowest price at which he or she is willing to sell a good.
• Individual producer surplus is the net gain to a seller from selling a good. It is equal to the difference between the price received and the seller’s cost.
• Total producer surplus in a market is the sum of the individual producer surpluses of all the sellers of a good.
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Engelbert
S
$45
35
25
5
15
Donna
Carlos
Betty
Andrew
Price of book
Quantity of books
Cost Potential
sellers
$45
35
25
15
5
Engelbert
Donna
Carlos
Betty
Andrew
The Supply Curve for Used Textbooks
Betty’s producer surplusAndrew’s
producer surplus
Carlos’s producer surplus
Price = $30
543210
S
$45
35
30
25
5
15
Price of book
Quantity of books
Engelbert
Donna
Carlos
Betty
Andrew
Producer Surplus in the Used Textbook Market
The total producer surplus from sales of a good at a given price is the area above the supply curve
but below that price. S
Producer surplus
$5
1 million0
Price of wheat (per bushel)
Quantity of wheat (bushels)
Price = $5
Producer Surplus
Changes in Producer Surplus
• When the price of a good rises, producer surplus increases through two channels:
1. the gains of those who would have supplied the good even at the original, lower price
2. the gains of those who are induced to supply the good by the higher price
S
1.5 million
$7
5
1 million0
Price of wheat (per bushel)
Quantity of wheat (bushels)
Increase in producer surplus to original sellers
Producer surplus gained by new sellers
A Rise in the Price Increases Producer Surplus
New price = $7
Original price = $5
When the price is P2, producer surplus is
a. A.
b. A + C.
c. A + B + C.
d. D + E.
What happens when the price falls from P2 to P1
The Costs of Five Possible Sellers
Seller Cost
Kyle $1,500
Nathan 1,200
Cheslea 1,000
Hillary 750
Landon 500
• If the market price is $1,000, the producer surplus in the market would be ___
• If the price is $1,000, Landon’s producer surplus would be___
• What area represents producer surplus when the price is P1? a. A
b. B
c. C
d. D
Putting It Together: Total Surplus
▪ The total surplus generated in a market is the total net gain to consumers and producers from trading in the market. It is the sum of the producer and the consumer surplus.
▪ The concepts of consumer surplus and producer surplus can help us understand why markets are an effective way to organize economic activity.
S
D
Price of book
Quantity of books1,000
$30
0
Equilibrium quantity
Equilibrium price
Producer surplus
Consumer surplus
E
Total Surplus
Consumer Surplus, Producer Surplus, and the Gains from Trade
▪ The previous graph shows that both consumers and producers are better off because there is a market in this good; i.e., there are gains from trade.
▪ These gains from trade are the reason everyone is better off participating in a market economy than they would be if each individual tried to be self-sufficient.
▪ But are we as well off as we could be? This brings us to the question of the efficiency of markets.
In the figure shown, the equilibrium (market-clearing) price is ____
In the figure shown, at the market-clearing equilibrium, total consumer surplus is represented by the area ____, total producer surplus is represented by the area ______
In the figure shown, at the quantity Q2, a. the market is in equilibrium. b. willingness to pay is greater than willingness to sell. c. consumer surplus plus producer surplus is maximized. d. willingness to pay is less than willingness to sell.
SUMMARY
1. The willingness to pay of each individual consumer determines the demand curve.
When price is less than or equal to the willingness to pay, the potential consumer purchases the good.
The difference between willingness to pay and price is the net gain to the consumer, the individual consumer surplus.
2. Total consumer surplus in a market, the sum of all individual consumer surpluses in a market.
A rise in the price of a good reduces consumer surplus; a fall in the price increases consumer surplus.
SUMMARY
3. The cost of each potential producer, the lowest price at which he or she is willing to supply a unit of that good, determines the supply curve.
If the price of a good is above a producer’s cost, a sale generates a net gain to the producer, known as the individual producer surplus.
4. Total producer surplus in a market, the sum of the individual producer surpluses in a market, is equal to the area above the market supply curve but below the price.
