07 Efficiency of Markets SV

07 Efficiency of Markets SV - Welfareeconomics Recall the...

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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 1 Welfare economics Recall, the allocation of resources refers to: how much of each good is produced which producers produce it which consumers consume it ________ economics : the study of how the allocation of resources affects economic well-being First, we look at the well-being of consumers.
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 2 Willingness to Pay (WTP) A buyer’s willingness to pay for a good is the _________ amount the buyer will pay for that unit of good. Essentially, WTP measures how much the buyer _______ the good.
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 3 Scenario : After years of hard work in my run-down garage at home, I finally built up my prototype time-travel machine which can turn the time backward and forward. To fathom the market demand for my “get-rich” product, I decide to randomly survey 4 students from our class about their WTP to take a pilot ride on my new time machine:
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 4 Flea is the one who is most excited about the trip. He wants to go back to the time of dinosaurs. He is willing to pay $300. Anthony would like to see 200 years in the future. He is willing to pay $250. Chad values the trip the third highest. He’d like to relive the entire quarter. He will pay up to $175. John has minimal interest in the trip. All he wants is to pay up to $125 to move the clock forward to the end of this class period.
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 5 WTP and the Demand Curve Q: If price of a ride is $200, who will buy a ride, and what is quantity demanded? A: Anthony & Flea will buy the ride, Chad & John will not. Hence, Q d = ____ when P = $200. name WTP Anthony $250 Chad 175 Flea 300 John 125
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 6 WTP and the Demand Curve Derive the demand schedule: John, Chad, Anthony, Flea 0 – 125 Chad, Anthony, Flea 126 – 175 Anthony, Flea 176 – 250 Flea 251 – 300 nobody Q d who buys P (price of ride) name WTP Anthony $250 Chad 175 Flea 300 John 125
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 7 $0 $50 $100 $150 $200 $250 $300 $350 0 1 2 3 4 WTP and the Demand Curve P Q d $301 & up 0 251 – 300 1 176 – 250 2 126 – 175 3 0 – 125 4 P Q
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CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 8 $0 $50 $100 $150 $200 $250 $300 $350 0 1 2 3 4 About the Staircase Shape… This D curve looks like a staircase with 4 steps – one per buyer. P Q If there were a huge # of buyers, as in a competitive market, there would be a huge # of very tiny steps, and it would look more like a smooth curve.
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CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 9 $0 $50 $100 $150 $200 $250 $300 $350 0 1 2 3 4 WTP and the Demand Curve At any Q , the height of the D curve is the WTP/valuation of the ______________ ____ , the buyer who would leave the market if P were any higher. P
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07 Efficiency of Markets SV - Welfareeconomics Recall the...

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