Econ 1-26-2011 - Econ Willingness to Pay and Demand...

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Econ 1-26-2011 Willingness to Pay and Demand Willingness to Pay : maximum price a person is willing to pay for a good. Example : Willingness to pay for a used textbook o Assume individuals are willing to buy only one o Assume individuals buy when price is greater than the willingness to pay (= by convention) o We can used this information to derive a market demand curve o Step function, because there are only 5 customers. (See angel for graph) o Willingness to pay can result in a “profit” for an individual. Willingness to Sell and Supply Willingness to Sell: minimum price a seller is willing to accept for a good. Competitive Markets are Efficient The much-celebrated result… o Key word: Competitive Suppose markets are competitive, then the equilibrium outcome is efficient. o Efficiency : no one can be made better off without someone being made worse off. o In this case, Efficiency maximizes total surplus.
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