Consumer Surplus, Producer Surplus and the Efficiency (1)

Consumer Surplus, Producer Surplus and the Efficiency (1) -...

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Unformatted text preview: Consumer Surplus, Producer Surplus and the Efficiency of markets Lecture 1 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? 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 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 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: Anthony & Flea will buy an iPod, Chad & John will not. Hence, Q d = 2 when P = $200. name WTP Anthony $250 Chad 175 Flea 300 John 125 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 nobody $301 & up Q d who buys P (price of iPod) name WTP Anthony $250 Chad 175 Flea 300 John 125 CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 7 $0 $50 $100 $150 $200 $250 $300 $350 1 2 3 4 WTP and the Demand Curve P Q d $301 & up 251 – 300 1 176 – 250 2 126 – 175 3 0 – 125 4 P Q CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 8 $0 $50 $100 $150 $200 $250 $300 $350 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. CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 9 $0 $50 $100 $150 $200 $250 $300 $350 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....
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Consumer Surplus, Producer Surplus and the Efficiency (1) -...

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