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Similar to Consumer Surplus Producer Surplus and Market.ppt
Consumer Surplus Producer Surplus and Market.ppt
- 1. Consumer Surplus, Producer Surplus,and Market Efficiency
- 2. Consumer Surplus andthe Demand Curve Example is the market for used textbooks, concentrating on the buyers. The example is going to show that the demand curve is derived from people’s tastes or preferences and these tastes and preferences also determine how much they gain from the opportunity to buy used books.
- 3. Willingness to Pay Maximum price at which he or she would buy a good Individuals won’t buy the good if it costs more than this among but eager to do so if it cost less If the price is just equal to an individual’s willingness to pay, he or she is indifferent between buying and not buying
- 4. $59 45 35 25 10 5 4 3 2 1 0 D $59 45 35 10 25 Aleisha Brad Claudia Darren Edwina Price of book Quantity ofbooks Potential buyers Willingness to pay Aleisha Brad Claudia Darren Edwina The Demand Curve for Used Textbooks A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.
- 5. Willingness to Pay Not a smooth curve because it is only dealing with a small number of consumers Each horizontal segment = how much one is willing to pay What is the quantity demanded at $59? What is the quantity demanded at $45?
- 6. Willingness to Pay& Consumer Surplus Campus Bookstore makes used textbooks available at a price of $30. Who will buy books? Do they gain from their purchase?
- 7. Consumer Surplus inthe Used Textbook Market Price = $30 Aleisha’s consumer surplus: $59-$39=$29 Brad’s consumer surplus: $45-$30=$15 Claudia’s consumer surplus: $35-$30=$5 The total consumer surplus is given by the entire shaded area - the sum of the individual consumer surpluses of Aleisha, Brad, and Claudia - equal to $29 + $15 + $5 = $49. 5 4 3 2 1 0 Aleisha Brad Claudia Darren D Edwina $59 45 35 30 10 25 Price of book Quantity of books
- 8. Willingness to Pay& Consumer Surplus Individual Consumer Surplus – net gain that a buyer achieves from the purchase of a good Whenever a buyer pays a price less than his or her willingness to pay, the buy achieves an individual consumer surplus Total Consumer Surplus – sum of the individual consumer surpluses achieved by all the buyers of a good Aleisha, Brad and Claudia: $29 +$15 +$5 = $49
- 9. Consumer Surplus Refersto both individual and total consumer surplus Total consumer surplus is equal to the area below the demand curve but above the price The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price
- 10. Changing Prices Affects ConsumerSurplus Textbook Example again….. BUT……the bookstore has now decided to sell used textbooks for $20 instead of $30. How much would this fall in price increase consumer surplus?
- 11. Consumer Surplus anda Fall in the Price of Used Textbooks Darren’s consumer surplus Increase in Aleisha’s consumer surplus Increase in Brad’s consumer surplus Increase in Claude’s consumer surplus 5 4 3 2 1 0 D $59 45 35 30 10 25 20 Aleisha Brad Claudia Darren Edwina Price of book Quantity of books Original price = $30 New price = $20
- 12. Changing Prices Affects ConsumerSurplus The graph showed that when the price of a good falls, the area under the demand curve but not above the price (which is equal to total consumer surplus) increases
- 13. Producer Surplus andthe Supply Curve We have buyers of goods that would be willing to pay more for their purchase than the price they actually pay Some sellers of a good would have been willing to sell it for less than the price they actually receive
- 14. Producer Surplus andthe Supply Curve Seller’s cost – lowest price at which a potential seller is willing to sell What is Andrew’s cost? What is Betty’s cost?
- 15. Producer Surplus andthe Supply Curve Since the students don’t have to manufacture the books, does it cost the student who sells a book anything to make that book available for sale? YES! You won’t have it later in your personal collection – opportunity cost! When saying “cost” of a good as a seller, referring to selling that good even if you don’t spend any money to sell the good
- 16. Producer Surplus andthe Supply Curve Individual Producer Surplus – the net gain, the difference between the price he actually gets and his cost, the minimum price at which he would have been willing to sell Total Producer Surplus – the total net gain to all sellers in the market Producer Surplus – refers to either the total or individual producer surplus
- 17. Producer Surplus inthe Used Textbook Market Betty’s producer surplus Andrew’s producer surplus Carlos’s producer surplus Price = $30 5 4 3 2 1 0 S $45 35 30 25 5 15 Price of book Quantity of books Engelbert Donna Carlos Betty Andrew Total Producer Surplus is given by the entire shaded area, the sum of the individual producer surpluses of Andrew, Betty, and Carlos. $25 + $15 + $5 = $45 The total producer surplus from sales of a good at a given price is the area above the supply curve but below that price.
- 18. How Changing PriceAffects Producer Surplus When the price of a good rises, producer surplus increases through two ways: The gains of those who would have supplied the good even at the original, lower price and The gains of those who are induced to supply the good by the higher price
- 19. A Rise inthe Price Increases Producer Surplus S Increase in producer surplus to original sellers Consumer surplus gained by new sellers
- 20. Consumer Surplus, Producer Surplus,and the Gains from Trade Total Surplus generated in a market is the total net gain to consumers and producers from trading in the market. It is the sum of the producer and the consumer surplus This also shows there are gains from trade
- 21.
- 22. The Efficiency ofMarkets Markets are usually “efficient” Are they? It is claimed that once the market has produced its gains from trade, there is no way to make some people better off without making ofther people worse off, except…..under well-defined conditions
- 23. The Efficiency ofMarkets A committee wants to improve on the market equilibrium by deciding who gets and who gives up a used textbook. The goal of the committee – bypass the market outcome and come up with another arrangement that would produce higher total surplus
- 24. The Efficiency ofMarkets Three ways to increase the total surplus: 1. Reallocate consumption among consumers 2. Reallocate sales among sellers 3. Change the quantity traded
- 25. 1. Reallocate consumption amongconsumers Committee tries to increase total surplus by selling books to different consumers
- 26. 2. Reallocate salesamong sellers Committee tried to increase total surplus by altering who sells their books, taking sales away from sellers who would have sold their books in the market equilibrium and instead compelling those who would not have sold their books in the market equilibrium to sell them
- 27. 3. Change thequantity traded Committee tries to increase total surplus by compelling students to trade either more books or fewer books than the market equilibrium quantity.
- 28. The Efficiency ofMarkets Key Idea: once this market is in equilibrium, there is no way to increase the gains from trade An efficient market performs four important functions
- 29. The Efficiency ofMarkets An efficient market performs four important functions 1. It allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay 2. It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost
- 30. The Efficiency ofMarkets 3. It ensures that every consumer who makes a purchase values the good more than every seller who makes a sale, so that all transactions are mutually beneficial 4. It ensures that every potential buyer who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale, so that no mutually beneficial transaction are missed
- 31. The Efficiency ofMarkets Three caveats: 1. Market can be efficient, it isn’t necessarily fair 2. Markets sometimes fail 3. Even when market equilibrium maximizes total surplus, this does not mean that it results in the best outcome for every individual consumer and producer
- 32. The Efficiency ofMarkets Efficiency is about how to achieve goals, not what those goals should be
- 33. Consumer Surplus, Producer Surplus,and Market Efficiency Notes
- 34. Willingness to Pay Individuals won’t buy the good if it costs more than this among but eager to do so if it cost less If the price is just equal to an individual’s willingness to pay, he or she is indifferent between buying and not buying
- 35. $59 45 35 25 10 5 4 3 2 1 0 D $59 45 35 10 25 Aleisha Brad Claudia Darren Edwina Price of book Quantity ofbooks Potential buyers Willingness to pay Aleisha Brad Claudia Darren Edwina The Demand Curve for Used Textbooks
- 36. Willingness to Pay What is the quantity demanded at $59? What is the quantity demanded at $45?
- 37. Willingness to Pay& Consumer Surplus Campus Bookstore makes used textbooks available at a price of $30. Who will buy books? Do they gain from their purchase?
- 38. Consumer Surplus inthe Used Textbook Market Price = $30 Aleisha’s consumer surplus: $59-$39=$29 Brad’s consumer surplus: $45-$30=$15 Claudia’s consumer surplus: $35-$30=$5 5 4 3 2 1 0 Aleisha Brad Claudia Darren D Edwina $59 45 35 30 10 25 Price of book Quantity of books
- 39. Willingness to Pay& Consumer Surplus Individual Consumer Surplus – net gain that a buyer achieves from the purchase of a good Total Consumer Surplus – sum of the individual consumer surpluses achieved by all the buyers of a good
- 40. Consumer Surplus Refersto both individual and total consumer surplus
- 41. Consumer Surplus anda Fall in the Price of Used Textbooks Darren’s consumer surplus Increase in Aleisha’s consumer surplus Increase in Brad’s consumer surplus Increase in Claude’s consumer surplus 5 4 3 2 1 0 D $59 45 35 30 10 25 20 Aleisha Brad Claudia Darren Edwina Price of book Quantity of books Original price = $30 New price = $20
- 42. Changing Prices Affects ConsumerSurplus The graph showed that when the price of a good falls, the area under the demand curve but not above the price (which is equal to total consumer surplus) increases
- 43. Producer Surplus andthe Supply Curve We have buyers of goods that would be willing to pay more for their purchase than the price they actually pay
- 44. Producer Surplus andthe Supply Curve Seller’s cost – lowest price at which a potential seller is willing to sell What is Andrew’s cost? What is Betty’s cost?
- 45. Producer Surplus andthe Supply Curve Since the students don’t have to manufacture the books, does it cost the student who sells a book anything to make that book available for sale? YES!
- 46. Producer Surplus andthe Supply Curve Individual Producer Surplus – Total Producer Surplus – Producer Surplus –
- 47. Producer Surplus inthe Used Textbook Market Betty’s producer surplus Andrew’s producer surplus Carlos’s producer surplus Price = $30 5 4 3 2 1 0 S $45 35 30 25 5 15 Price of book Quantity of books Engelbert Donna Carlos Betty Andrew
- 48. How Changing PriceAffects Producer Surplus When the price of a good rises, producer surplus increases through two ways:
- 49. A Rise inthe Price Increases Producer Surplus S Increase in producer surplus to original sellers Consumer surplus gained by new sellers
- 50. Consumer Surplus, Producer Surplus,and the Gains from Trade This also shows there are gains from trade
- 51.
- 52. The Efficiency ofMarkets Markets are usually “efficient” Are they? It is claimed that once the market has produced its gains from trade, there is no way to make some people better off without making ofther people worse off, except…..under well-defined conditions
- 53. The Efficiency ofMarkets A committee wants to improve on the market equilibrium by deciding who gets and who gives up a used textbook. The goal of the committee – bypass the market outcome and come up with another arrangement that would produce higher total surplus
- 54. The Efficiency ofMarkets Three ways to increase the total surplus: 1. Reallocate consumption among consumers 2. Reallocate sales among sellers 3. Change the quantity traded
- 55. 1. Reallocate consumption amongconsumers Committee tries to increase total surplus by selling books to different consumers
- 56. 2. Reallocate salesamong sellers Committee tried to increase total surplus by altering who sells their books, taking sales away from sellers who would have sold their books in the market equilibrium and instead compelling those who would not have sold their books in the market equilibrium to sell them
- 57. 3. Change thequantity traded Committee tries to increase total surplus by compelling students to trade either more books or fewer books than the market equilibrium quantity.
- 58. The Efficiency ofMarkets Key Idea: once this market is in equilibrium, there is no way to increase the gains from trade An efficient market performs four important functions
- 59. The Efficiency ofMarkets An efficient market performs four important functions 1. It allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay 2. It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost
- 60. The Efficiency ofMarkets 3. It ensures that every consumer who makes a purchase values the good more than every seller who makes a sale, so that all transactions are mutually beneficial 4. It ensures that every potential buyer who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale, so that no mutually beneficial transaction are missed
- 61. The Efficiency ofMarkets Three caveats: 1. Market can be efficient, it isn’t necessarily fair 2. Markets sometimes fail 3. Even when market equilibrium maximizes total surplus, this does not mean that it results in the best outcome for every individual consumer and producer
- 62. The Efficiency ofMarkets Efficiency is about how to achieve goals, not what those goals should be