Ch7 - Chapter ¡¢ Consumers£ Producers£ and the...

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Unformatted text preview: Chapter ¡¢ Consumers£ Producers£ and the Efficiency of Markets In this chapter¡ look for the answers to these questions) 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$ Or could the market outcome be improved upon$ CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS Welfare Economics Recall¡ the allocation of resources refers to¢ how much of each good is produced which producers produce it which consumers consume it Welfare economics studies how the allocation of resources affects economic well£being¤ First¡ we look at the well£being of consumers¤ CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS Willingness to Pay ¡WTP¢ $ buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good¡ WTP measures how much the buyer values the good¡ name WTP $nthony ¢£¤¥ Chad ¦§¤ Flea ¨¥¥ John ¦£¤ Example© ª buyers’ WTP for an iPod CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS WTP and the Demand Curve Q) If price of iPod is ¡¢££¤ who will buy an iPod¤ and what is quantity demanded$ A) ¥nthony ¦ Flea will buy an iPod¤ Chad ¦ John will not§ Hence¤ Q d " ¢ when P " ¡¢££§ name WTP ¥nthony ¡¢¨£ Chad ©ª¨ Flea «££ John ©¢¨ CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS WTP and the Demand Curve Derive the demand schedule¡ ¢ John£ Chad£ $nthony£ Flea ¤ – ¥¦§ ¨ Chad£ $nthony£ Flea ¥¦© – ¥ª§ ¦ $nthony£ Flea ¥ª© – ¦§¤ ¥ Flea ¦§¥ – ¨¤¤ ¤ nobody «¨¤¥ ¬ up Q d who buys P ­price of iPod® name WTP $nthony «¦§¤ Chad ¥ª§ Flea ¨¤¤ John ¥¦§ CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS WTP and the Demand Curve P Q d ¡¢£¤ ¥ up £ ¦§¤ – ¢££ ¤ ¤¨© – ¦§£ ¦ ¤¦© – ¤¨§ ¢ £ – ¤¦§ ª P Q CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS About the Staircase Shape… This . curve looks like a staircase with ¡ 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¢ CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS WTP and the Demand Curve $t any Q ¡ the height of the . curve is the WTP of the marginal buyer ¡ the buyer who would leave the market if P were any higher¢ P Q Flea’s WTP $nthony’s WTP Chad’s WTP John’s WTP CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS Consumer Surplus ¡CS¢ Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays¡ CS " WTP – P name WTP $nthony ¢£¤¥ Chad ¦§¤ Flea ¨¥¥ John ¦£¤ Suppose P " ¢£©¥ª Flea’s CS " ¢¨¥¥ – £©¥ " ¢«¥ª The others get no CS because they do not buy an iPod at this priceª Total CS " ¢«¥ª CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS CS and the Demand Curve P Q Flea’s WTP P " ¡¢£¤ Flea’s CS " ¡¥¤¤ – ¢£¤ " ¡¦¤ Total CS " ¡¦¤ CONSUMERS¡ PRODUCERS¡ AND THE EFFICIENCY OF MARKETS...
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This note was uploaded on 03/22/2011 for the course ECON 200 taught by Professor Ta during the Spring '07 term at University of Washington.

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Ch7 - Chapter ¡¢ Consumers£ Producers£ and the...

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