microeconomic
titanicdicar
MiCh7ConsumersProducersandtheEfficiencyofMarkets.pptxConsumers, Producers, and the Efficiency of Markets
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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PowerPoint Slides prepared by:
V. Andreea CHIRITESCU
Eastern Illinois University
N. GREGORY MANKIW PRINCIPLES OF MICROECONOMICS Eight Edition
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Consumer Surplus
Welfare economics
The study of how the allocation of resources affects economic well-being
Benefits that buyers and sellers receive from engaging in market transactions
How society can make these benefits as large as possible
In any market, the equilibrium of supply and demand maximizes the total benefits received by all buyers and sellers combined
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Consumer Surplus
Willingness to pay
Maximum amount that a buyer will pay for a good
How much that buyer values the good
Consumer surplus
Amount a buyer is willing to pay for a good minus amount the buyer actually pays
Willingness to pay minus price paid
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Table 1 Four Possible Buyers’ Willingness to Pay
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Consumer Surplus
Consumer surplus
Measures the benefit buyers receive from participating in a market
Closely related to the demand curve
Demand schedule
Derived from the willingness to pay of the possible buyers
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 1 The Demand Schedule and the Demand Curve
The table shows the demand schedule for the buyers (listed in Table 1) of the mint-condition copy of Elvis Presley’s first album. The graph shows the corresponding demand curve. Note that the height of the demand curve reflects the buyers’ willingness to pay.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
$100
80
70
50
Price of Albums
0
4
3
1
2
Quantity of Albums
Taylor’s willingness to pay
Carrie’s willingness to pay
Rihanna’s willingness to pay
Gaga’s willingness to pay
Demand
Consumer Surplus
At any quantity, the price given by the demand curve
Shows the willingness to pay of the marginal buyer
The buyer who would leave the market first if the price were any higher
Consumer surplus in a market
Area below the demand curve and above the price
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 2 Measuring Consumer Surplus with the Demand Curve
In panel (a), the price of the good is $80 and the consumer surplus is $20.
In panel (b), the price of the good is $70 and the consumer surplus is $40.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
$100
80
70
50
Price of
Albums
0
4
3
1
2
Quantity of Albums
Taylor’s consumer
surplus ($20)
Demand
(a) Price = $80
$100
80
70
50
Price of
Albums
0
4
3
1
2
Quantity of Albums
Taylor’s consumer
surplus ($30)
(b) Price = $70
Carrie’s consumer
surplus ($10)
Total consumer
surplus ($40)
Demand
Consumer Surplus
A lower price raises consumer surplus
Existing buyers: increase in consumer surplus
Buyers who were already buying the good at the higher price are better off because they now pay less
New buyers enter the market: increase in consumer surplus
Willing to buy the good at the lower price
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 3 How Price Affects Consumer Surplus
In panel (a), the price is P1, the quantity demanded is Q1, and consumer surplus equals the area of the triangle ABC.
When the price falls from P1 to P2, as in panel (b), the quantity demanded rises from Q1 to Q2 and the consumer surplus rises to the area of the triangle ADF. The increase in consumer surplus (area BCFD) occurs in part because existing consumers now pay less (area BCED) and in part because new consumers enter the market at the lower price (area CEF).
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Price
0
Quantity
(a) Consumer Surplus at Price P1
(b) Consumer Surplus at Price P2
Demand
Q1
Consumer
surplus
B
C
A
Price
0
Quantity
Demand
Initial
consumer
surplus
A
Q2
B
D
C
E
F
Additional consumer surplus to initial consumers
Consumer surplus
to new consumers
Q1
P2
P1
P1
Consumer Surplus
Consumer surplus
Benefit that buyers receive from a good
As the buyers themselves perceive it
Good measure of economic well-being
Exception: illegal drugs
Drug addicts are willing to pay a high price for heroin
Society’s standpoint: drug addicts don’t get a large benefit from being able to buy heroin at a low price
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Producer Surplus
Cost
Value of everything a seller must give up to produce a good
Measure of willingness to sell
Producer surplus
Amount a seller is paid for a good minus the seller’s cost of providing it
Price received minus willingness to sell
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Table 2 The Costs of Four Possible Sellers
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Producer Surplus
Producer surplus
Closely related to the supply curve
Supply schedule
Derived from the costs of the suppliers
At any quantity
Price given by the supply curve shows the cost of the marginal seller
Seller who would leave the market first if the price were any lower
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 4 The Supply Schedule and Supply Curve
The table shows the supply schedule for the sellers (listed in Table 2) of painting services. The graph shows the corresponding supply curve. Note that the height of the supply curve reflects the sellers’ costs.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
$900
800
600
500
Price of House Painting
0
4
3
1
2
Quantity of Houses Painted
Vincent’s cost
Claude’s cost
Pablo’s cost
Andy’s cost
Supply
Producer Surplus
Supply curve
Reflects sellers’ costs
Used to measure producer surplus
Producer surplus in a market
Area below the price and above the supply curve
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 5 Measuring Producer Surplus with the Supply Curve
In panel (a), the price of the good is $600 and the producer surplus is $100.
In panel (b), the price of the good is $800 and the producer surplus is $500.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
$900
800
600
500
Price of House Painting
$900
800
600
500
Price of House Painting
0
4
3
1
2
Quantity of Houses Painted
Andy’s producer
surplus ($100)
Supply
(a) Price = $600
(b) Price = $800
Andy’s producer
surplus ($300)
Pablo’s producer
surplus ($200)
Total producer
surplus ($500)
0
4
3
1
2
Quantity of Houses Painted
Supply
Producer Surplus
A higher price raises producer surplus
Existing sellers: increase in producer surplus
Sellers who were already selling the good at the lower price are better off because they now get more for what they sell
New sellers enter the market: increase in producer surplus
Willing to produce the good at the higher price
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 6 How Price Affects Producer Surplus
In panel (a), the price is P1, the quantity supplied is Q1, and producer surplus equals the area of the triangle ABC.
When the price rises from P1 to P2, as in panel (b), the quantity supplied rises from Q1 to Q2 and the producer surplus rises to the area of the triangle ADF. The increase in producer surplus (area BCFD) occurs in part because existing producers now receive more (area BCED) and in part because new producers enter the market at the higher price (area CEF).
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Price
0
Quantity
(a) Producer Surplus At Price P1
(b) Producer Surplus At Price P2
Supply
P1
Q1
Producer
surplus
B
C
A
Price
0
Quantity
Supply
P1
Q1
Initial
producer
surplus
A
P2
Q2
B
D
C
E
F
Additional producer surplus to initial producers
Producer surplus
to new producers
Market Efficiency
The benevolent social planner
All-knowing, all-powerful, well-intentioned dictator
Wants to maximize the economic well-being of everyone in society
Economic well-being of a society
Total surplus
Sum of consumer and producer surplus
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency
Total surplus = Consumer surplus + Producer surplus
Consumer surplus = Value to buyers – Amount paid by buyers
Producer surplus = Amount received by sellers – Cost to sellers
Amount paid by buyers = Amount received by sellers
Total surplus = Value to buyers – Cost to sellers
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency
Efficiency
Property of a resource allocation
Maximizing the total surplus received by all members of society
Equality
Property of distributing economic prosperity uniformly among the members of society
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency
Gains from trade in a market
Like a pie to be shared among the market participants
The question of efficiency
Whether the pie is as big as possible
The question of equality
How the pie is sliced
How the portions are distributed among members of society
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency
Market outcomes
Free markets allocate the supply of goods to the buyers who value them most highly
Measured by their willingness to pay
Free markets allocate the demand for goods to the sellers who can produce them at the least cost
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Figure 7 Consumer and Producer Surplus in the Market Equilibrium
Total surplus—the sum of consumer and producer surplus—is the area between the supply and demand curves up to the equilibrium quantity.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Price
0
Quantity
Equilibrium
quantity
Equilibrium
price
Demand
Supply
Consumer
surplus
Producer
surplus
B
C
A
D
E
Market Efficiency
At market equilibrium, social planner
Cannot increase economic well-being by
Changing the allocation of consumption among buyers
Changing the allocation of production among sellers
Cannot rise total economic well-being by
Increasing or decreasing the quantity of the good
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency
Market outcomes
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus
Market equilibrium
Efficient allocation of resources
The benevolent social planner
“Laissez faire” = “let people do as they will”
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Figure 8 The Efficiency of the Equilibrium Quantity
At quantities less than the equilibrium quantity, such as Q1, the value to buyers exceeds the cost to sellers.
At quantities greater than the equilibrium quantity, such as Q2, the cost to sellers exceeds the value to buyers.
Therefore, the market equilibrium maximizes the sum of producer and consumer surplus.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Price
0
Quantity
Equilibrium
quantity
Demand
Supply
Q1
Q2
Value
to
buyers
Value
to buyers
Cost
to
sellers
Cost
to sellers
Value to buyers is greater than cost to sellers
Value to buyers is less than cost to sellers
Market Efficiency
Adam Smith’s invisible hand
Takes all the information about buyers and sellers into account
Guides everyone in the market to the best outcome
Economic efficiency
Free markets
Best way to organize economic activity
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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ASK THE EXPERTS
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Supplying Kidneys
“A market that allows payment for human kidneys should be established on a trial basis to help extend the lives of patients with kidney disease.”
Should there be a market for organs?
“How a mother’s love helped save two lives”
Ms. Stevens - her son needed a kidney transplant
The mother’s kidney was not compatible
Donated one of her kidneys to a stranger
Her son was moved to the top of the kidney waiting list
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Should there be a market for organs?
Questions
Trade a kidney for a kidney?
Trade a kidney for an expensive, experimental cancer treatment?
Exchange her kidney for free tuition for her son?
Sell her kidney for cash?
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Should there be a market for organs?
Current public policy
Illegal for people to sell their organs
Government has imposed a price ceiling of zero: shortage
Large benefits to allowing a free market in organs
People are born with two kidneys
Usually need only one
Few people – no working kidney
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Should there be a market for organs?
Current situation
Typical patient waits several years for a kidney transplant
Every year, thousands of people die because a kidney cannot be found
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Should there be a market for organs?
Allow for kidney market
Balance supply and demand
Sellers get extra cash in their pockets
Buyers get to live
No more shortage of kidneys
Efficient allocation of resources
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Should there be a market for organs?
Critics: worry about fairness
Benefit the rich at the expense of the poor
Current system: is it fair?
Some people have an extra kidney they don’t really need
Others are dying to get one
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Market Efficiency & Market Failure
Forces of supply and demand
Allocate resources efficiently
Several assumptions about how markets work
Markets are perfectly competitive
Outcome in a market matters only to the buyers and sellers in that market
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency & Market Failure
When these assumptions do not hold
“Market equilibrium is efficient” may no longer be true
In the world, competition is far from perfect
Market power
A single buyer or seller (small group)
Control market prices
Markets are inefficient
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency & Market Failure
In the world
Decisions of buyers and sellers
Affect people who are not participants in the market at all
Externalities - cause welfare in a market to depend on more than just the value to the buyers and the cost to the sellers
Inefficient equilibrium - from the standpoint of society as a whole
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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Market Efficiency & Market Failure
Market failure
E.g.: market power and externalities
The inability of some unregulated markets to allocate resources efficiently
Public policy
Can potentially remedy the problem and increase economic efficiency
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
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