2010 post-5

2010 post-5 - Total Received(PxQ = P,b,Q s,O Total Min...

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I. Consumer Surplus (C.S.) A. Individual Example: Joe buys cups of coffee (per day) P $3 $2 P* If P* = Market Price = $1.25, $1 then Joe Buys 2 Cups $.75 (D-curve shows MB) 1 2 3 4 Q 1. Total benefit (from 2 cups) $3 + $2 = $5 2. Total paid = $2.50 Consumer Surplus (CS) – A buyers total willingness to pay (total benefit) minus the amount actually paid. A measure of consumer welfare In our example, CS is (3-1.25) + (2-1.25) = $2.50.
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B. Market consumer surplus ● a P* ●b eq m P 0 Q d Consumer Surplus is always the area between demand curve and the price (out to q). II. Producer Surplus P P* b a O Q s Q Producer Surplus (PS) = The amount the seller is paid for a given quantity minus the seller’s minimum willingness to accept for that quantity. A measure of producer welfare. Producer Surplus is always the area between the price and the supply curve (out to q). Total Benefit = a,b,Q d ,0 Total Paid = P*,b,Q d ,0 Supply Curve shows the minimum a firm is willing to accept to sell a given quantity.
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Unformatted text preview: Total Received (PxQ) = P*,b,Q s ,O Total Min firms are willing to accept for Q s = a,b,Q s ,O III. Efficiency A. Definition: Efficiency is achieved when total surplus (total welfare) is maximized. B. Efficiency and the Market Outcome Total Surplus = CS + PS P S ≈ Marginal Cost CS P* PS D = Marginal Benefit Q* Q CS + PS = (total maximum amount buyers are willing to pay minus actual amount paid) + amount received by seller minus total minimum amount sellers are willing to accept). 1. The amount paid by the buyer equals the amount received by the seller (no govt.). Thus, CS + PS = (total maximum amount buyers are willing to pay minus total minimum amount sellers are willing to accept). This is the same as saying CS + PS = total benefit to buyers minus total cost to sellers. 2. Total benefit minus total cost (CS + PS) is then equal to total surplus. Total surplus will be maximized where MB = MC (where S = D). Thus the market outcome is efficient!...
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This note was uploaded on 03/31/2008 for the course ECON 2010 taught by Professor Mertens,wi during the Spring '07 term at Colorado.

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2010 post-5 - Total Received(PxQ = P,b,Q s,O Total Min...

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