Consumers, producers, and the efficiency of markets C Chapter 7
Consumers, Producers, and the Efficiency of Markets Chapter 7
Revisiting the market equilibrium Do the equilibrium price and quantity maximize the total welfare of buyers and sellers Market equilibrium reflects the way markets allocate scarce resources Whether the market allocation is desirable is determined by welfare economics
Revisiting the Market Equilibrium Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? • Market equilibrium reflects the way markets allocate scarce resources. • Whether the market allocation is desirable is determined by welfare economics
Welfare economics Welfare economics is the study of how the allocation of resources affects economic well-being Buyers and sellers receive benefits from taking part in the market o The equilibrium in a market maximizes the total welfare of buyers and sellers
Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being. • Buyers and sellers receive benefits from taking part in the market. • The equilibrium in a market maximizes the total welfare of buyers and sellers
Welfare economics Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product o Consumer surplus measures economic welfare from the buyer's side o Producer surplus measures economic welfare from the seller's side
Welfare Economics • Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product. • Consumer surplus measures economic welfare from the buyer’s side. • Producer surplus measures economic welfare from the seller’s side
Consumer Surplus Willingness to pay is the maximum price that a buyer is willing and able to pay for a good o It measures how much the buyer values the good or service e Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Consumer Surplus • Willingness to pay is the maximum price that a buyer is willing and able to pay for a good. • It measures how much the buyer values the good or service. • Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
FO our Possible buyers Wil illingness to Pay… Buⅴer Willingness to Pay John $100 Paul 80 George 70 Ringo 50 e Who will get the book? What is the consumer surplus? What about two textbooks?
Four Possible Buyers’ Willingness to Pay... • Who will get the book? What is the consumer surplus? • What about two textbooks? Buyer Willingness to Pay John $100 Paul 80 George 70 Ringo 50
FO our Possible buyers Willingness to Pay… Wi Price Buyer Quantity Demanded More than $100 None 0 s80to$100 John $70to$80 John paul 12 50to$70 John Paul, George 3 S50 or less John Paul 4 George, Ringo
Four Possible Buyers’ Willingness to Pay... Price Buyer Quantity Demanded More than $100 None 0 $80 to $100 John 1 $70 to $80 John, Paul 2 $50 to $70 John, Paul, George 3 $50 or less John, Paul, George,Ringo 4
Measuring Consumer Surplus with the demand curve Price of Album $100 Johns willingness to pay 80 Pauls willingness to pay 70 George's willingness to pay pay Ringos willingness to pay 50 Demand 0 2 4 Q quantity of Albums
Price of Album 50 70 80 0 $100 1 2 3 4 Quantity of Albums John’s willingness to pay Paul’s willingness to pay George’s willingness to pay Ringo’s willingness to pay Demand Measuring Consumer Surplus with the Demand Curve
Measuring Consumer Surplus with the demand curve Price of Album Price=$80 $100 John's consumer surplus($20 80 70 50 Demand 0 2 4 Q quantity of Albums
Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1 2 3 4 Quantity of Albums Demand John’s consumer surplus ($20) Price = $80
Measuring Consumer Surplus with the demand curve Price of Price=$70 Album $100 HJohn's consumer surplus($30) 80 Pauls consumer surplus(10) 70 50 Total consumer surplus($40) Demand 0 2 4 Q quantity of Albums
Price of Album 50 70 80 0 $100 1 2 3 4 Quantity of Albums Demand John’s consumer surplus ($30) Total consumer surplus ($40) Price = $70 Paul’s consumer surplus ($10) Measuring Consumer Surplus with the Demand Curve