Consumer Surplus, Producer Surplus and the Efficiency (2)

Consumer Surplus, Producer Surplus and the Efficiency (2) -...

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Consumer Surplus, Producer  Surplus and the Efficiency of  markets Lecture 1
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Key Questions: What is consumer’s surplus? How is it  related to the demand curve? What is producer’s 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?
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Welfare Economics Allocation of resources refers to: How much of a good is being produced? Which producers produce it? Which consumers consume it? Welfare Economics  studies how the  allocation of resources affects economic  well-being We will first consider the well-being of  buyers
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CONSUMERS,  PRODUCERS, AND THE  EFFICIENCY OF MARKETS 4 Willingness to Pay (WTP) A 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 Anthony $250 Chad 175 Flea 300 John 125 Example:   4 buyers’ WTP  for an iPod
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CONSUMERS,  PRODUCERS, AND THE  EFFICIENCY OF MARKETS 5 WTP and the Demand Curve Q: If price of iPod is $200, who will buy an iPod, and  what is quantity demanded? A: Hence,  Q d  = 2  when  P  = $200. name WTP Anthony $250 Chad 175 Flea 300 John 125
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CONSUMERS,  PRODUCERS, AND THE  EFFICIENCY OF MARKETS 6 WTP and the Demand Curve Derive the  demand  schedule: 4 John, Chad,  Anthony, Flea    0 – 125 3 Chad, Anthony,  Flea 126 – 175 2 Anthony, Flea 176 – 250 1 Flea 251 – 300 0 nobody Q d who buys P  (price  of iPod) name WTP Anthony $250 Chad 175 Flea 300 John 125
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CONSUMERS,  PRODUCERS, AND THE  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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CONSUMERS,  PRODUCERS, AND THE  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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PRODUCERS, AND THE  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 of the  marginal buyer the buyer who  would leave the  market if  P  were  any higher. P
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This note was uploaded on 06/03/2011 for the course ECON 224 taught by Professor Ozturk during the Fall '09 term at South Carolina.

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Consumer Surplus, Producer Surplus and the Efficiency (2) -...

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