Académique Documents
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Consumers,
Producers, and the
Efficiency of Markets
Midterm I
Will cover the material from Chapters 1, 2, 4, 5, 6, 7.
Will consist of 50-60 multiple-choice and true-false
questions
Closed-everything (i.e., books, notes, laptops and etc.)
Bring only calculators
Welfare Economics
Welfare economics is the study of how the allocation
Welfare Economics
Consumer surplus measures economic welfare
from the buyers side.
Producer surplus measures economic welfare
from the sellers side.
CONSUMER SURPLUS
Willingness to pay is the maximum amount
that a buyer will pay for a good.
It measures how much the buyer values a given
quantity of the good or service.
10
11
12
is the consumer with the next highest willingness to pay. She would like to
see 200 years in the future. Shed pay $2500.
is the next highest bidder. Hed like to relive this entire semester. Hell pay
up to $800.
is our fourth consumer. Shed pay $200 to move the clock forward to the
end of this class period.
A
$3,000
B
$2,500
$800
$200
13
CS
$3,000
$2,500
$800
$200
Total
14
CS
$3,000
$2,500
$800
$200
Total
15
16
$100
80
70
50
Demand
Quantity of Albums
80
70
50
Demand
Quantity of
Albums
Paul s consumer
surplus ($10)
70
50
Total
consumer
surplus ($40)
Demand
0
4 Quantity of
Albums
20
Consumer
surplus
P1
Demand
Q1
Quantity
Initial
consumer
surplus
P1
P2
Consumer surplus
to new consumers
F
D
E
Additional consumer
surplus to initial
consumers
Q
Demand
Quantity
23
24
PRODUCER SURPLUS
Producer surplus is the amount a seller is paid for a
good minus the sellers cost.
It measures the benefit to sellers participating in a
market.
26
27
29
Supply
$900
800
600
500
Grandma s producer
surplus ($100)
4
Quantity of
Houses Painted
$900
Supply
Total
producer
surplus ($500)
800
600
Georgia s producer
surplus ($200)
500
Grandmas producer
surplus ($300)
4
Quantity of
Houses Painted
P1
B
Producer
surplus
A
0
Q1
Quantity
P2
P1
Supply
Additional producer
surplus to initial
producers
D
E
F
B
Initial
producer
surplus
Producer surplus
to new producers
A
0
Q1
Q2
Quantity
34
MARKET EFFICIENCY
Assume that a government equally cares about well
being of consumers and producers.
Consumer surplus and producer surplus may be
used to address the following question:
Is the allocation of resources determined by free markets
in any way desirable?
Or should the government interfere and try to improve
upon the market allocation?
35
MARKET EFFICIENCY
Consumer Surplus
= Value to buyers Amount paid by buyers
and
Producer Surplus
= Amount received by sellers Cost to sellers
36
MARKET EFFICIENCY
Total surplus
= Consumer surplus + Producer surplus =
(Value to buyers Amount paid by buyers) + (Amount received by sellers Cost to sellers)
or
Total surplus
= Value to buyers Cost to sellers
37
MARKET EFFICIENCY
Efficiency is the property of a resource allocation of
maximizing the total surplus received by all
members of society.
Is the market equilibrium efficient?
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
Demand
C
0
Equilibrium
quantity
Quantity
39
MARKET EFFICIENCY
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
0
Value
to
buyers
Equilibrium
quantity
Demand
Quantity
41
Price of
Ice-Cream
Cone
Supply
3
Equilibrium
price
Demand
60 70 100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
42
43
44
45
Summary
Consumer surplus equals buyers willingness to pay
for a good minus the amount they actually pay for
it.
Consumer surplus measures the benefit buyers get
from participating in a market.
Consumer surplus can be computed by finding the
area below the demand curve and above the price.
46
Summary
Producer surplus equals the amount sellers receive
for their goods minus their costs of production.
Producer surplus measures the benefit sellers get
from participating in a market.
Producer surplus can be computed by finding the
area below the price and above the supply curve.
47
Summary
An allocation of resources that maximizes the sum
of consumer and producer surplus is said to be
efficient.
Policymakers are often concerned with the
efficiency, as well as the equity, of economic
outcomes.
48
Summary
The equilibrium of demand and supply maximizes
the sum of consumer and producer surplus.
This is as if the invisible hand of the marketplace
leads buyers and sellers to allocate resources
efficiently.
Markets do not allocate resources efficiently in the
presence of market failures.