6 - Ch. 7, 10 Consumers, Producers & the Efficiency of...

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1 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Ch. 7, 10 Consumers, Producers Efficiency of Markets and Externalities Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Revisiting the Market Equilibrium s Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? s Market equilibrium reflects the way markets allocate scarce resources. s Whether the market allocation is desirable can be addressed by welfare economics. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Welfare Economics s Welfare economics : the study of how the allocation of resources affects economic well- being. s Buyers and sellers receive benefits from participating in the market. s Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product.
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2 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Consumer Surplus s Every buyer in an economy is only willing to pay up to a certain amount for a good or service. We define: s Willingness-to-pay : the maximum amount that a buyer will pay for a good. - measures the value the buyer places on the good s When a buyer actually pays less than he/she is willing to pay, they enjoy a benefit. We define: Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Consumer surplus : the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it. s The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices. - it depicts consumers’ willingness-to-pay. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. s Suppose the market price of a good is $50. $50 $100 450 D
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3 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. $50 $100 $75 200 450 D Copyright © 2006 Nelson, a division of Thomson Canada Ltd. $50 $100 $75 200 450 Someone who was willing to pay $75 for the good only has to pay $50. They get a benefit of $25 = the amount of extra money they didn’t have to pay because P is lower than what they were willing to pay. D Copyright © 2006 Nelson, a division of Thomson Canada Ltd. $50 $100 $75 200 450 Someone who was willing to pay $75 for the good only has to pay $50. They get a benefit of $25 = the amount of extra money they didn’t have to pay because P is lower than what they were willing to pay. Anyone who would have paid more than $50 gets a benefit = their willingness- to-pay minus the $50 they actually pay. D
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4 Copyright © 2006 Nelson, a division of Thomson Canada Ltd. $50 $100 450 We can illustrate total benefits: Consumer Surplus, CS. It is the area under the demand curve above the selling price. A
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This note was uploaded on 04/13/2010 for the course CIVIL 2oi4 taught by Professor Lamiar during the Fall '10 term at McMaster University.

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6 - Ch. 7, 10 Consumers, Producers & the Efficiency of...

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