Consumers, Producers, and the Efficiency of

Consumers, Producers, and the Efficiency of - Consumers,...

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Unformatted text preview: Consumers, Producers, and the Efficiency of Markets I. Market Efficiency A. Consumer surplus and producer surplus are basic tools that economists use to study the welfare of buyers and sellers in a market. I. Market Efficiency These tools can help us address a fundamental economic question: Is the allocation of resources determined by free markets in any way desirable? II. The Benevolent Social Planner A. To evaluate market outcomes, we introduce into our analysis a new, hypothetical character, called the benevolent social planner. II. The Benevolent Social Planner 1) The benevolent planner is an all-knowing, all- powerful, well-intentioned dictator. 2) The planner wants to maximize the economic well being of everyone in society II. The Benevolent Social Planner B. To maximize the economic well-being of everyone the planner must first decide how to measure the economic well-being of society II. The Benevolent Social Planner 1) One possible measure is the sum of consumer and producer surplus, which we call total surplus. a) Consumer surplus is the benefit that buyers receive from participating in a market. b) Producer surplus is the benefit that sellers receive. II. The Benevolent Social Planner 2) It is therefore natural to use total surplus as a measure of societys economic well- being. II. The Benevolent Social Planner C. To better understand this measure of economic well-being, recall how we measure consumer and producer surplus. II. The Benevolent Social Planner 1) We define consumer surplus as Consumer surplus = Value to buyers Amount paid by buyers II. The Benevolent Social Planner 2) Similarly, we define producer surplus as Producer surplus = Amount received by sellers Cost to sellers II. The Benevolent Social Planner 3) When we add consumer and producer surplus together, we obtain a) Total surplus = value to buyers amount paid by buyers + amount received by sellers cost to sellers II. The Benevolent Social Planner b) The amount paid by buyers equals the amount received by sellers, so the middle two terms in this expression cancel each other. As a result, we can write total surplus as II. The Benevolent Social Planner c) Total surplus = value to buyers cost to sellers Total surplus in a market is the total value to buyers of the goods, as measured by their willingness to pay, minus the total cost to sellers of providing those goods. II. The Benevolent Social Planner D. If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency. II. The Benevolent Social PlannerII....
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Consumers, Producers, and the Efficiency of - Consumers,...

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