Scribd Logo
Upload

Welcome to Scribd!

  • 54 views

    BUS208 Microeconomics For Managers

    Uploaded by

    rahim
    This document discusses market efficiency and consumer/producer surplus. It contains the following key points: 1. Consumer surplus measures the benefit buyers receive from participating in a market, which is the amount a buyer is willing to pay minus the price paid. Producer surplus is the amount a seller is paid minus the seller's costs. 2. The equilibrium price in a competitive market maximizes total surplus, which is the sum of consumer and producer surplus. This occurs where supply and demand curves intersect. 3. Changes in price affect consumer and producer surplus. A lower price increases consumer surplus by benefiting existing buyers and attracting new ones, while a higher price increases producer surplus through similar mechanisms. 4.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    BUS208 Microeconomics For Managers

    Uploaded by

    rahim
    54 views21 pages
    This document discusses market efficiency and consumer/producer surplus. It contains the following key points: 1. Consumer surplus measures the benefit buyers receive from participating in a market, which is the amount a buyer is willing to pay minus the price paid. Producer surplus is the amount a seller is paid minus the seller's costs. 2. The equilibrium price in a competitive market maximizes total surplus, which is the sum of consumer and producer surplus. This occurs where supply and demand curves intersect. 3. Changes in price affect consumer and producer surplus. A lower price increases consumer surplus by benefiting existing buyers and attracting new ones, while a higher price increases producer surplus through similar mechanisms. 4.

    Original Title

    Lecture 4a

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses market efficiency and consumer/producer surplus. It contains the following key points: 1. Consumer surplus measures the benefit buyers receive from participating in a market, which is the amount a buyer is willing to pay minus the price paid. Producer surplus is the amount a seller is paid minus the seller's costs. 2. The equilibrium price in a competitive market maximizes total surplus, which is the sum of consumer and producer surplus. This occurs where supply and demand curves intersect. 3. Changes in price affect consumer and producer surplus. A lower price increases consumer surplus by benefiting existing buyers and attracting new ones, while a higher price increases producer surplus through similar mechanisms. 4.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    54 views21 pages

    BUS208 Microeconomics For Managers

    Uploaded by

    rahim
    This document discusses market efficiency and consumer/producer surplus. It contains the following key points: 1. Consumer surplus measures the benefit buyers receive from participating in a market, which is the amount a buyer is willing to pay minus the price paid. Producer surplus is the amount a seller is paid minus the seller's costs. 2. The equilibrium price in a competitive market maximizes total surplus, which is the sum of consumer and producer surplus. This occurs where supply and demand curves intersect. 3. Changes in price affect consumer and producer surplus. A lower price increases consumer surplus by benefiting existing buyers and attracting new ones, while a higher price increases producer surplus through similar mechanisms. 4.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 21

    BUS208 Microeconomics for Managers

    Markets, efficiency and welfare


    Lecture 4a:
    Consumers, Producers, and the Efficiency of Markets

    Roman Matousek
    [email protected]
    Lecture reading: Mankiw and Taylor 5th Ed, Chapter 6
    Mankiw and Taylor 4th Ed, Chapter 7

    Seminar preparation: Problem Set


    Consumer Surplus, Part 1
    • 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

    3
    Consumer Surplus, Part 2
    • 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

    4
    Consumer Surplus, Part 3
    • 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

    5
    Table 1 Four Possible Buyers’ Willingness to Pay

    Buyer Willingness to Pay

    $100
    Taylor
    80
    Carrie
    70
    Rihanna
    50
    Gaga

    6
    Figure 1 The Demand Schedule and the Demand Curve

    Quantity
    Price Buyers
    Demanded
    More than $100 None 0
    $80 to $100 Taylor 1
    $70 to $80 Taylor, Carrie 2
    $50 to $70 Taylor, Carrie, 3
    Rihanna
    $50 or less Taylor, Carrie, 4
    Rihanna, Gaga

    •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.

    7
    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.

    8
    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).

    9
    Producer Surplus, Part 1
    • 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

    10
    Producer Surplus, Part 2
    • 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

    11
    Table 2 The Costs of Four Possible Sellers

    Seller Cost

    Vincent $900

    Claude 800

    Pablo 600

    Andy 500

    12
    Figure 4 The Supply Schedule and Supply Curve

    Price Sellers Quantity


    Demanded
    $900 or more Vincent, Claude, 4
    Pablo, Andy
    $800 to $900 Claude, Pablo, 3
    Andy
    $600 to $800 Pablo, Andy 2
    $500 to $600 Andy 1
    Less than $500 None 0

    •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.

    13
    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.

    14
    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).

    15
    Market Efficiency, Part 1
    • Economic well-being of a society
    • Total surplus
    • Sum of consumer and producer surplus

    16
    Market Efficiency, Part 2
    • 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

    17
    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.

    18
    Market Efficiency & Market Failure, Part 1

    • Forces of supply and demand


    – Allocate resources efficiently
    • Several assumptions about how markets work
    1. Markets are perfectly competitive
    2. Outcome in a market matters only to the buyers and sellers
    in that market

    19
    Market Efficiency & Market Failure, Part 2

    • When these assumptions do not hold


    – “Market equilibrium is efficient” may no longer be true

    • In the world, competition is far from perfect.

    20
    BUS208 Microeconomics for Managers

    21

    You might also like