Ch 6 and 10 Consumer and Producer Surplus

Ch 6 and 10 Consumer and Producer Surplus - Ch. 7, 10...

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Ch. 7, 10 Consumers, Producers & the Efficiency of Markets and Externalities
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 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 can be addressed by welfare economics.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Welfare Economics Welfare economics : the study of how the allocation of resources affects economic well- being. Buyers and sellers receive benefits from participating in the market. 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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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Consumer Surplus Every buyer in an economy is only willing to pay up to a certain amount for a good or service. We define: Willingness-to-pay : the maximum amount that a buyer will pay for a good. - measures the value the buyer places on the good When a buyer actually pays less than he/she is willing to pay, they enjoy a benefit. We define:
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Consumer surplus : the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it. 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.
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Suppose the market price of a good is $50. $50 $100 450 D
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. $50 $100 $75 200 450 D
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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
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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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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 B C CS D CS
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Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
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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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Ch 6 and 10 Consumer and Producer Surplus - Ch. 7, 10...

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