BU204_Krugman_Chapter 05

BU204_Krugman_Chapter 05 - > Consumer and Producer...

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chapter What you will learn in this chapter: The meaning of consumer sur- plus and its relationship to the demand curve The meaning of producer sur- plus and its relationship to the supply curve The meaning and importance of total surplus and how it can be used both to measure the gains from trade and to evaluate the efficiency of a market How to use changes in total sur- plus to measure the deadweight loss of taxes 109 5 >> HERE IS A LIVELY MARKET IN SECOND - hand college textbooks. At the end of each term, some students who took a course decide that the money they can get by selling their used books is worth more to them than keeping the books. And some students who are taking the course next term prefer to buy a somewhat battered but inexpensive used textbook rather than pay the full price for a new one. Textbook publishers and authors are not happy about these transactions, because they cut into sales of new books. But both the students who sell used books and those who buy them clearly benefit from the existence of the mar- ket. That is why many col- lege bookstores facilitate their trade, buying used textbooks and selling them alongside the new books. But can we put a num- ber on what used textbook buyers and sellers gain from these trans- actions? Can we answer the question, “ How much do the buyers and sellers of textbooks gain from the existence of the used-book market?” Consumer and Producer Surplus MAKING GAINS BY THE BOOK T Yes, we can. In this chapter we will see how to measure benefits, such as those to buyers of used textbooks, from being able to purchase a good—known as consumer surplus . And we will see that there is a cor- responding measure, producer surplus , of the benefits sellers receive from being able to sell a good. The concepts of consumer surplus and producer surplus are extremely useful for analyzing a wide variety of economic issues. They let us calculate how much benefit pro- ducers and consumers receive from the exis- tence of a market. They also allow us to calculate how the welfare of consumers and producers is affected by changes in market How much am I willing to pay for that used textbook? David Young-Wolff/PhotoEdit
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Consumer Surplus and the Demand Curve The market in used textbooks is not a big business in terms of dollars and cents. But it is a convenient starting point for developing the concepts of consumer and produc- er surplus. So let’s look at the market for used textbooks, starting with the buyers. The key point, as we’ll see in a minute, is that the demand curve is derived from their tastes or prefer- ences—and that those same preferences also determine how much they gain from the opportunity to buy used books. Willingness to Pay and the Demand Curve A used book is not as good as a new book—it will be battered and coffee-stained, may include someone else’s highlighting, and may not be completely up to date. How much this bothers you depends on your own preferences. Some potential buyers
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BU204_Krugman_Chapter 05 - > Consumer and Producer...

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