Chapter 7 - CHAPTER 7 CONSUMERS PRODUCERS AND CONSUMERS EFFICIENCY OF MARKETS EFFICIENCY 1 Mainissues What is consumer surplus How is it related to

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1 CHAPTER 7 CHAPTER 7 CONSUMERS, PRODUCERS, AND CONSUMERS, PRODUCERS, AND EFFICIENCY OF MARKETS EFFICIENCY OF MARKETS
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2 Main issues What is consumer surplus? How is it related to the demand curve? What is producer surplus? How is it related to the supply curve? Do markets produce a desirable allocation of resources? Can market outcomes be improved upon?
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3 Welfare Economics Allocation of resources refers to: how much of each good is produced which producers produce it which consumers consume it Welfare economics : the study of how the allocation of resources affects economic well-being
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4 Willingness to Pay (WTP) willingness to pay for a good is the maximum amount a buyer will pay for that good. WTP measures how much the buyer values the good. 4 buyers’ WTP for an iPod is as follows: Name WTP Anthony $250 Chad 175 Flea 300 John 125
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5 WTP and the Demand Curve Q: If price of iPod is $200, who will buy an iPod, and what is quantity demanded? Name WTP Anthony $250 Chad 175 Flea 300 John 125
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6 WTP and the Demand Curve 4 John, Chad, Anthony, Flea 0 – 125 3 Chad, Anthony, Flea 126 – 175 2 Anthony, Flea 176 – 250 1 Flea 251 – 300 0 nobody $301 & up Q d who buys P (price of iPod) Name WTP Anthony $250 Chad 175 Flea 300 John 125
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7 WTP and the Demand Curve P Q Flea’s WTP Anthony’s WTP Chad’s WTP John’s WTP
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8 This D curve looks like a staircase with 4 steps – one per buyer. If there were a huge number of buyers, as in a competitive market, there would be a huge number of very tiny steps, and it would look more like a smooth curve. At any Q , the height of the D curve is the WTP of the marginal buyer , the buyer who would leave the market if P were any higher.
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9 Consumer Surplus (CS) Consumer surplus is the amount a buyer is willing to pay minus the buyer actually pays: CS = WTP P Name WTP Anthony $250 Chad 175 Flea 300 John 125 Suppose P = $260. Flea’s CS = $300 – 260 = $40. The others get no CS because they do not buy an iPod at this price. Total CS = $40.
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10 CS and the Demand Curve P Q Flea’s WTP P = $260 Flea’s CS = $300 – 260 = $40 Total CS = $40
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11 CS and the Demand Curve P Q Flea’s WTP Anthony’s WTP Instead, suppose P = $220 Flea’s CS = $300 – 220 = $80 Anthony’s CS = $250 – 220 = $30 Total CS = $110
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12 CS and the Demand Curve Lesson : Total CS equals the area under the demand curve above the price from 0 to Q
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13 P Q $ CS with Lots of Buyers & a Smooth D Curve The demand for shoes D At Q = 5 (thousand), the marginal buyer is willing to pay $50 for pair of shoes.
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This note was uploaded on 01/27/2011 for the course ECON 1000 taught by Professor Ayhoo during the Spring '10 term at California Coast University.

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Chapter 7 - CHAPTER 7 CONSUMERS PRODUCERS AND CONSUMERS EFFICIENCY OF MARKETS EFFICIENCY 1 Mainissues What is consumer surplus How is it related to

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