Econ 100.

2 Microeconomics

Discussion Class
September 20, 2018
UP School of Economics

Glacer Vasquez
[email protected]

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Ques&ons?  
 

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 market efficiency

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Outline

Ø  Welfare  Economics  

Ø  Consumer  
•  Willingness  to  Pay  
•  Willingness  to  Pay  and  Demand  
•  Consumer  Surplus  
Ø  Producer  
•  Cost  
•  Cost  and  Supply  
•  Producer  Surplus  
Ø  Total  Surplus  
Ø  Market  Efficiency  

9/20/18 Econ 100.2 Discussion Class   4

Our Goal for Today: Market Efficiency

500

400
S

300

200
D

100

5 10 15 20 25 30 Q

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Welfare Economics

•  Welfare  economics  studies  how  the  alloca&on  of  resources  

affects  economic  well-­‐being.  

•  The  alloca&on  of  resources  refers  to:  

o  how  much  of  each  good  is  produced  
o  which  producers  produce  it  
o  which  consumers  consume  it  

 
9/20/18 Econ 100.2 Discussion Class   6
Willingness to Pay

•  A  buyer’s  willingness  to  pay  for  a  good  is  the  maximum  amount  
the  buyer  will  pay  for  that  good.      
•  WTP  measures  how  much  the  buyer  values  the  good.  
•  How  much  are  you  willing  to  pay  for  a  certain  good?  

Willingness to Pay
Consumer WTP
A 500
B 450
C 400
 
D 350
E 300
  F 250

 
9/20/18 Econ 100.2 Discussion Class   7
Willingness to Pay and Demand

Willingness to Pay and Quantity Demanded

Consumer WTP P = 250 P = 300 P = 350 P = 400 P = 450 P = 500 P = 550
A 500 Buy Buy Buy Buy Buy Buy No
B 450 Buy Buy Buy Buy Buy No No
C 400 Buy Buy Buy Buy No No No
D 350 Buy Buy Buy No No No No
E 300 Buy Buy No No No No No
F 250 Buy No No No No No No
Qd = 6 Qd = 5 Qd = 4 Qd = 3 Qd = 2 Qd = 1 Qd = 0
Decision Rule: Buy only if WTP >= P

9/20/18 Econ 100.2 Discussion Class   8

Willingness to Pay and Demand
Demand Schedule
Price Qd At any Q, the height of the D
0 - 250 6 P curve is the WTP of the marginal
251 - 300 5 buyer, the buyer who would leave
301 - 350 4 the market if P were any higher.
351 - 400 3
401 - 450 2 500
451 - 500 1
501 and up 0 400

Willingness to Pay 300

Consumer WTP
A 500 200
B 450
C 400 100
D 350
E 300
F 250 1 2 3 4 5 6 Q

9/20/18 Econ 100.2 Discussion Class   9

Consumer Surplus

•  Consumer  surplus  is  the  amount  a  buyer  is  willing  to  pay  minus  
the  amount  the  buyer  actually  pays:  CS  =  WTP  –  P  
•  Suppose  P  =  300.  
P
Willingness to Pay
Consumer WTP
A 500 500
B 450
C 400 400
D 350
E 300 300
F 250
200

100

1 2 3 4 5 6 Q
9/20/18 Econ 100.2 Discussion Class   10
Consumer Surplus

•  Consumer  surplus  is  the  amount  a  buyer  is  willing  to  pay  minus  
the  amount  the  buyer  actually  pays:  CS  =  WTP  –  P  
•  Suppose  P  =  400.  
P
Willingness to Pay
Consumer WTP
A 500 500
B 450
C 400 400
D 350
E 300 300
F 250
200

100

1 2 3 4 5 6 Q
9/20/18 Econ 100.2 Discussion Class   11
Consumer Surplus

Willingness to Pay and Consumer Surplus

Consumer WTP P = 300 CS P = 400 CS
A 500 Buy 200 Buy 100
B 450 Buy 150 Buy 50
C 400 Buy 100 Buy 0
D 350 Buy 50 No 0
E 300 Buy 0 No 0
F 250 No 0 No 0
Qd = 5 Total CS = 500 Qd = 3 Total CS = 150
Consumer Surplus = WTP - Price

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Consumer Surplus

CS = 1/2 x 25 x PhP200
P
= PhP2,500
What happens to CS
500 when P increases?
400

300

200
D

100

5 10 15 20 25 30 Q

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Consumer Surplus

CS = 1/2 x 12.5 x PhP100

P
= PhP625
CS decreases when P
500 increases
1.  buyers leave market
400 2.  remaining buyers pay
higher price.
300

200
D

100

5 10 15 20 25 30 Q

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Ques&ons?  
 

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Cost

•  Cost  is  the  value  of  everything  a  seller  must  give  up  to  produce  a  
good  (i.e.,  opportunity  cost).      
•  Cost  is  a  measure  of  willingness  to  sell.    
•  How  much  are  you  willing  to  sell  for  a  certain  good?  

Cost
Seller Cost
A 250
B 300
C 350
D 400
  E 450
F 500
 

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Cost and Supply

Cost and Quantity Supplied

Seller Cost P = 200 P = 250 P = 300 P = 350 P = 400 P = 450 P = 500
A 250 No Sell Sell Sell Sell Sell Sell
B 300 No No Sell Sell Sell Sell Sell
C 350 No No No Sell Sell Sell Sell
D 400 No No No No Sell Sell Sell
E 450 No No No No No Sell Sell
F 500 No No No No No No Sell
Qs = 0 Qs = 1 Qs = 2 Qs = 3 Qs = 4 Qs = 5 Qs = 6
Decision Rule: Sell only if P >= Cost

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Cost and Supply
Supply Schedule
Price Qs At any Q, the height of the S
0 - 249 0 P curve is the cost of the marginal
250 - 299 1 seller, the seller who would leave
300 - 349 2 the market if P were any lower.
350 - 399 3
400 - 449 4 500
450 - 499 5
500 and up 6 400

Cost 300
Seller Cost
A 250 200
B 300
C 350 100
D 400
E 450
F 500 1 2 3 4 5 6 Q

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Producer Surplus

•  Producer  surplus  is  the  amount  a  seller  is  paid  for  a  good    
minus  the  seller’s  cost:  PS  =  P  –  Cost  
•  Suppose  P  =  300.  
P
Cost
Seller Cost
A 250 500
B 300
C 350 400
D 400
E 450 300
F 500
200

100

1 2 3 4 5 6 Q
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Producer Surplus

•  Producer  surplus  is  the  amount  a  seller  is  paid  for  a  good    
minus  the  seller’s  cost:  PS  =  P  –  Cost  
•  Suppose  P  =  400.  
P
Cost
Seller Cost
A 250 500
B 300
C 350 400
D 400
E 450 300
F 500
200

100

1 2 3 4 5 6 Q
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Producer Surplus

Cost and Producer Surplus

Seller Cost P = 300 PS P = 400 PS
A 250 Sell 50 Sell 150
B 300 Sell 0 Sell 100
C 350 No 0 Sell 50
D 400 No 0 Sell 0
E 450 No 0 No 0
F 500 No 0 No 0
Qs = 2 Total PS = 50 Qs = 4 Total PS = 300
Consumer Surplus = Price - Cost

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Producer Surplus

PS = 1/2 x 25 x PhP150
P
= PhP1,875
What happens to PS
500 when P decreases?
400
S

300

200

100

5 10 15 20 25 30 Q

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Producer Surplus

PS = 1/2 x 8.75 x PhP50

P
= PhP218.75
PS decreases when P decreases
500 1.  sellers leave market
2.  remaining sellers pay lower price.
400
S

300

200

100

5 10 15 20 25 30 Q

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Ques&ons?  
 

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Total Surplus

CS = (value to buyers) – (amount paid by buyers)

= buyers’ gains from participating in the market
PS = (amount received by sellers) – (cost to sellers)
= sellers’ gains from participating in the market

Total surplus = CS + PS
= total gains from trade in a market
= [value to buyers – amount paid by buyers] +
[amount received by sellers – cost to sellers]
= (value to buyers) – (cost to sellers)

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Total Surplus

500

400
S

300

200
D

100

5 10 15 20 25 30 Q

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Efficiency

Total surplus = CS + PS
= (value to buyers) – (cost to sellers)

An allocation of resources is efficient if it maximizes total surplus.

Efficiency means:
q  The goods are consumed by the buyers who value them most
highly.
q  The goods are produced by the producers with the lowest costs.
q  Raising or lowering the quantity of a good would not increase
total surplus.
 

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Market Efficiency

Is the market equilibrium efficient?

P

500

400
S

300

200
D

100

5 10 15 20 25 30 Q

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Market Efficiency
Which buyers consume the good?
ü  The goods are consumed by the buyers who
P value them most highly.
Which sellers produce the good?
ü  The goods are produced by the producers
500 with the lowest costs.
400
S

300

200
D

100

5 10 15 20 25 30 Q

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Market Efficiency
At Q = 30, cost of producing marginal unit is
PhP325, but the value to consumers of the
P marginal unit is only PhP250.

Increase surplus by decreasing Q!

500

400
S

300

200
D

100

5 10 15 20 25 30 Q

9/20/18 Econ 100.2 Discussion Class   30

Market Efficiency
At Q = 10, cost of producing marginal unit is
PhP200, but the value to consumers of the
P marginal unit is only PhP425.

Increase surplus by increasing Q!

500

400
S

300

200
D

100

5 10 15 20 25 30 Q

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Market Efficiency
The market equilibrium quantity maximizes total
surplus.
P At any other quantity, total surplus can increase by
moving toward the market equilibrium quantity.
ü  Raising or lowering the quantity of a good would
500 not increase total surplus.

400
S

300

200
D

100

5 10 15 20 25 30 Q

9/20/18 Econ 100.2 Discussion Class   32

Market Efficiency

An allocation of resources is efficient if it maximizes total surplus.

Efficiency means:
ü  The goods are consumed by the buyers who value them most
highly.
ü  The goods are produced by the producers with the lowest costs.
ü  Raising or lowering the quantity of a good would not increase
total surplus.
Is the market equilibrium efficient?
YES!!!
Note: What is our assumption?
•  Perfect competition

 
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Market Efficiency

Free Market or
Government Intervention?

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Ques&ons?  
 

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Outline

Ø  Welfare  Economics  

Ø  Consumer  Surplus  
•  Willingness  to  Pay  
•  Demand  Curve  
•  Consumer  Surplus  
Ø  Producer  Surplus  
•  Cost  
•  Supply  Curve  
•  Producer  Surplus  
Ø  Total  Surplus  
Ø  Market  Efficiency  

9/20/18 Econ 100.2 Discussion Class   36

Where are we now?
C. Markets and Welfare

1. Market Efficiency
2. Taxation and Efficiency

Mankiw, Chapters 7-9

Samuelson and Nordhaus, Chapter 17
Harford, Chapter 3
Landsburg, Chapter 8

D. Market Failures and Economics of the Public Sector

1. Externalities
2. Public goods

Mankiw, Chapters 10-11

Samuelson and Nordhaus, Chapter 11, 16-17
Levitt and Dubner [2009], Chapter 5
Lansburg, Chapter 9
Miller, et.al, Chapter 25 and 27

SECOND EXAMINATION
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What’s next?

Next:  Taxa)on  and  Efficiency  

 
 

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Thank  you  
 

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