Description
A consumer is a person or group of people who are the final users of products and or services generated within a social system. A consumer may be a person or group, such as a household. The concept of a consumer may vary significantly by context, although a common definition is an individual who buys products or services for personal use and not for manufacture or resale.
Consumers, producers, and the efficiency of markets
• Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? • Market equilibrium reflects the way markets allocate scarce resources. • Whether the market allocation is desirable can be addressed by welfare economics.
Welfare Economics
• Welfare economics is the study of how the
allocation of resources affects economic wellbeing. • Buyers and sellers receive benefits from taking part in the market. • The equilibrium in a market maximizes the total welfare of buyers and sellers.
Welfare Economics
• Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product. • Consumer surplus measures economic welfare from the buyer’s side. • Producer surplus measures economic welfare from the seller’s side.
CONSUMER SURPLUS
• Willingness to pay is the maximum amount that a buyer will pay for a good. • It measures how much the buyer values the good or service. • Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.
Four Possible Buyers’ Willingness to Pay
CONSUMER SURPLUS
• The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices.
The Demand Schedule and the Demand Curve
Figure 1 The Demand Schedule and the Demand Curve
Price of Album
$100
John ’s willingness to pay
80 70
Paul ’ s willingness to pay George ’s willingness to pay
50
Ringo ’s willingness to pay
Demand
0
1
2
3
4
Quantity of Albums
Figure 2 Measuring Consumer Surplus with the Demand Curve
(b) Price = $70 Price of Album $100 John ’s consumer surplus ($30) 80 70 Total consumer surplus ($40)
Paul ’s consumer surplus ($10)
50
Demand 0 1 2 3 4 Quantity of Albums
Using the Demand Curve to Measure Consumer Surplus
• The area below the demand curve and above the price measures the consumer surplus in the market.
Figure 3 How the Price Affects Consumer Surplus
(a) Consumer Surplus at Price P Price A
Consumer surplus P1 B C
Demand
0
Q1
Quantity
Figure 3 How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P Price A
Initial consumer surplus P1 C B
Consumer surplus to new consumers
P2
F D E Additional consumer surplus to initial consumers Demand
0
Q1
Q2
Quantity
What Does Consumer Surplus Measure?
• Consumer surplus, the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it.
PRODUCER SURPLUS
• Producer surplus is the amount a seller is paid for a good minus the seller’s cost. • It measures the benefit to sellers participating in a market.
Table 2 The Costs of Four Possible Sellers
Using the Supply Curve to Measure Producer Surplus
• Just as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve.
The Supply Schedule and the Supply Curve
Figure 4 The Supply Schedule and the Supply Curve
Using the Supply Curve to Measure Producer Surplus
• The area below the price and above the supply curve measures the producer surplus in a market.
Figure 5 Measuring Producer Surplus with the Supply Curve
(b) Price = $800
Price of House Painting
Supply
$900
Total producer surplus ($500)
800
600 500 Georgia ’s producer surplus ($200)
Grandma’s producer surplus ($300)
0
1
2
3
4 Quantity of Houses Painted
Figure 6 How the Price Affects Producer Surplus
(a) Producer Surplus at Price P Price Supply
P1
B Producer surplus C
A 0 Q1 Quantity
Figure 6 How the Price Affects Producer Surplus
(b) Producer Surplus at Price P Price Additional producer surplus to initial producers D Supply
E
F
P2
P1
B Initial producer surplus C Producer surplus to new producers
A 0 Q1 Q2 Quantity
MARKET EFFICIENCY
• Consumer surplus and producer surplus may be used to address the following question:
• Is the allocation of resources determined by free markets in any way desirable?
Consumer Surplus = Value to buyers – Amount paid by buyers and Producer Surplus = Amount received by sellers – Cost to sellers
MARKET EFFICIENCY
Total surplus = Consumer surplus + Producer surplus or Total surplus = Value to buyers – Cost to sellers • Efficiency is the property of a resource allocation of maximizing the total surplus received by all members of society. • In addition to market efficiency, a social planner might also care about equity – the fairness of the distribution of well-being among the various buyers and sellers.
Figure 7 Consumer and Producer Surplus in the Market Equilibrium
Price A D
Supply
Consumer surplus Equilibrium price Producer surplus E
B C 0 Equilibrium quantity
Demand
Quantity
MARKET EFFICIENCY
• Three Insights Concerning Market Outcomes
• Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. • Free markets allocate the demand for goods to the sellers who can produce them at least cost. • Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
Figure 8 The Efficiency of the Equilibrium Quantity
Price Supply
Value to buyers
Cost to sellers
Cost to sellers 0 Equilibrium quantity
Value to buyers is greater than cost to sellers.
Value to buyers
Demand
Quantity
Value to buyers is less than cost to sellers.
Evaluating the Market Equilibrium
• Because the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it. • This policy of leaving well enough alone goes by the French expression laissez faire.
Evaluating the Market Equilibrium
• Market Power
• If a market system is not perfectly competitive, market power may result.
• Market power is the ability to influence prices. • Market power can cause markets to be inefficient because it keeps price and quantity from the equilibrium of supply and demand.
Evaluating the Market Equilibrium
• Externalities
• created when a market outcome affects individuals other than buyers and sellers in that market. • cause welfare in a market to depend on more than just the value to the buyers and cost to the sellers.
• When buyers and sellers do not take externalities into account when deciding how much to consume and produce, the equilibrium in the market can be inefficient.
doc_261082364.pptx
A consumer is a person or group of people who are the final users of products and or services generated within a social system. A consumer may be a person or group, such as a household. The concept of a consumer may vary significantly by context, although a common definition is an individual who buys products or services for personal use and not for manufacture or resale.
Consumers, producers, and the efficiency of markets
• Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? • Market equilibrium reflects the way markets allocate scarce resources. • Whether the market allocation is desirable can be addressed by welfare economics.
Welfare Economics
• Welfare economics is the study of how the
allocation of resources affects economic wellbeing. • Buyers and sellers receive benefits from taking part in the market. • The equilibrium in a market maximizes the total welfare of buyers and sellers.
Welfare Economics
• Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product. • Consumer surplus measures economic welfare from the buyer’s side. • Producer surplus measures economic welfare from the seller’s side.
CONSUMER SURPLUS
• Willingness to pay is the maximum amount that a buyer will pay for a good. • It measures how much the buyer values the good or service. • Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.
Four Possible Buyers’ Willingness to Pay
CONSUMER SURPLUS
• The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices.
The Demand Schedule and the Demand Curve
Figure 1 The Demand Schedule and the Demand Curve
Price of Album
$100
John ’s willingness to pay
80 70
Paul ’ s willingness to pay George ’s willingness to pay
50
Ringo ’s willingness to pay
Demand
0
1
2
3
4
Quantity of Albums
Figure 2 Measuring Consumer Surplus with the Demand Curve
(b) Price = $70 Price of Album $100 John ’s consumer surplus ($30) 80 70 Total consumer surplus ($40)
Paul ’s consumer surplus ($10)
50
Demand 0 1 2 3 4 Quantity of Albums
Using the Demand Curve to Measure Consumer Surplus
• The area below the demand curve and above the price measures the consumer surplus in the market.
Figure 3 How the Price Affects Consumer Surplus
(a) Consumer Surplus at Price P Price A
Consumer surplus P1 B C
Demand
0
Q1
Quantity
Figure 3 How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P Price A
Initial consumer surplus P1 C B
Consumer surplus to new consumers
P2
F D E Additional consumer surplus to initial consumers Demand
0
Q1
Q2
Quantity
What Does Consumer Surplus Measure?
• Consumer surplus, the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it.
PRODUCER SURPLUS
• Producer surplus is the amount a seller is paid for a good minus the seller’s cost. • It measures the benefit to sellers participating in a market.
Table 2 The Costs of Four Possible Sellers
Using the Supply Curve to Measure Producer Surplus
• Just as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve.
The Supply Schedule and the Supply Curve
Figure 4 The Supply Schedule and the Supply Curve
Using the Supply Curve to Measure Producer Surplus
• The area below the price and above the supply curve measures the producer surplus in a market.
Figure 5 Measuring Producer Surplus with the Supply Curve
(b) Price = $800
Price of House Painting
Supply
$900
Total producer surplus ($500)
800
600 500 Georgia ’s producer surplus ($200)
Grandma’s producer surplus ($300)
0
1
2
3
4 Quantity of Houses Painted
Figure 6 How the Price Affects Producer Surplus
(a) Producer Surplus at Price P Price Supply
P1
B Producer surplus C
A 0 Q1 Quantity
Figure 6 How the Price Affects Producer Surplus
(b) Producer Surplus at Price P Price Additional producer surplus to initial producers D Supply
E
F
P2
P1
B Initial producer surplus C Producer surplus to new producers
A 0 Q1 Q2 Quantity
MARKET EFFICIENCY
• Consumer surplus and producer surplus may be used to address the following question:
• Is the allocation of resources determined by free markets in any way desirable?
Consumer Surplus = Value to buyers – Amount paid by buyers and Producer Surplus = Amount received by sellers – Cost to sellers
MARKET EFFICIENCY
Total surplus = Consumer surplus + Producer surplus or Total surplus = Value to buyers – Cost to sellers • Efficiency is the property of a resource allocation of maximizing the total surplus received by all members of society. • In addition to market efficiency, a social planner might also care about equity – the fairness of the distribution of well-being among the various buyers and sellers.
Figure 7 Consumer and Producer Surplus in the Market Equilibrium
Price A D
Supply
Consumer surplus Equilibrium price Producer surplus E
B C 0 Equilibrium quantity
Demand
Quantity
MARKET EFFICIENCY
• Three Insights Concerning Market Outcomes
• Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. • Free markets allocate the demand for goods to the sellers who can produce them at least cost. • Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
Figure 8 The Efficiency of the Equilibrium Quantity
Price Supply
Value to buyers
Cost to sellers
Cost to sellers 0 Equilibrium quantity
Value to buyers is greater than cost to sellers.
Value to buyers
Demand
Quantity
Value to buyers is less than cost to sellers.
Evaluating the Market Equilibrium
• Because the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it. • This policy of leaving well enough alone goes by the French expression laissez faire.
Evaluating the Market Equilibrium
• Market Power
• If a market system is not perfectly competitive, market power may result.
• Market power is the ability to influence prices. • Market power can cause markets to be inefficient because it keeps price and quantity from the equilibrium of supply and demand.
Evaluating the Market Equilibrium
• Externalities
• created when a market outcome affects individuals other than buyers and sellers in that market. • cause welfare in a market to depend on more than just the value to the buyers and cost to the sellers.
• When buyers and sellers do not take externalities into account when deciding how much to consume and produce, the equilibrium in the market can be inefficient.
doc_261082364.pptx