Econ25200F10Mtg5

Econ25200F10Mtg5 - Econ 25200 – 5 th Class Demand and...

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Unformatted text preview: Econ 25200 – 5 th Class Demand and Supply & Market Efficiency (2) Market Gains • Basic intuition (1): IF a unit of a good is traded from where it is less valued to where it is more valued, THEN both sides can benefit from the transaction (and will if the transaction is voluntary) Market Gains • Basic Intuition (2): • IF in a market we make all the transactions where the buyer values the good more than the seller, and none of the transactions where the buyer values the good less than the seller, THEN we maximize benefits to market participants Consumer Surplus (CS) • On a given unit of a good: Buyer’s consumer surplus = MPB – P D Example: With MPB = 14 – (1/4)Q D For Q D = 4, then MPB = 14 – 1 = 13 If P D = 10, then CS = 13 – 10 = 3 Consumer Surplus P Q 14 56 4 P = 10 13 MPB Consumer Surplus • For entire market, • Consumer surplus = sum (integral) of consumer surplus on each unit purchased = area under demand curve and above price for buyers • CS = (1/2) (14 – 10) (16 – 0) = 32 Consumer Surplus P Q 14 56 2 P = 10 16 MPB Producer Surplus (PS) • On a given unit of a good: Seller’s producer surplus = P S – MPC Example: With MPC = 2 + (1/2)Q S For Q S = 4, then MPC = 2 + 2 = 4 If P S = 10, then PS = 10 – 4 = 6 Producer Surplus P Q 14 56 2 P = 10 4 MPC 4 Producer Surplus • For entire market, • Producer surplus = sum (integral) of producer surplus on each unit purchased = area above supply curve and below price for sellers • PS = (1/2) (10 – 2) (16 – 0) = 64 Producer Surplus P Q 14 56 2 P = 10 16 MPC Market Surplus (MS) • Note: this is H&O’B’s Economic Surplus • On specific unit traded, MS is sum of CS and PS on that unit, and measures net gains to participants in that trade • For Q = 4, MS = CS + PS = 3 + 6 = 9 • For Q = 4, MS = MPB – MPC = 13 – 4 = 9 Market Surplus P Q 14 56 2 P = 10 ....
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This note was uploaded on 02/06/2011 for the course ECON 252 taught by Professor Robertholand during the Fall '08 term at Purdue.

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Econ25200F10Mtg5 - Econ 25200 – 5 th Class Demand and...

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