1 Consumers, Producers, and the Efficiency of Markets Chapter 7
1 Consumers, Producers, and the Efficiency of Markets Chapter 7.
Dec 19, 2015
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1
Consumers, Producers, and the Efficiency of Markets
Chapter 7
2
Efficiency Equity
3
Economic Welfare
Welfare of buyers: consumer surplus.Welfare of suppliers: producer surplus.What price and quantity in a market
maximizes the sum of the two?That’s the efficient allocation.
4
Consumer Surplus
Table 1 Four Possible Buyers’ Willingness to Pay
Copyright©2004 South-Western
6
The Demand Schedule and the Demand Curve
Figure 1 The Demand Schedule and the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
Price ofAlbum
0 Quantity ofAlbums
Demand
1 2 3 4
$100 John’s willingness to pay
80 Paul’s willingness to pay
70 George’s willingness to pay
50 Ringo’s willingness to pay
Figure 2 Measuring Consumer Surplus with the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
(a) Price = $80
Price ofAlbum
50
70
80
0
$100
Demand
1 2 3 4 Quantity ofAlbums
John’s consumer surplus ($20)
Figure 2 Measuring Consumer Surplus with the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
(b) Price = $70Price of
Album
50
70
80
0
$100
Demand
1 2 3 4
Totalconsumersurplus ($40)
Quantity ofAlbums
John’s consumer surplus ($30)
Paul’s consumersurplus ($10)
Figure 3 How the Price Affects Consumer Surplus
Copyright©2003 Southwestern/Thomson Learning
Consumersurplus
Quantity
(a) Consumer Surplus at Price P
Price
0
Demand
P1
Q1
B
A
C
Figure 3 How the Price Affects Consumer Surplus
Copyright©2003 Southwestern/Thomson Learning
Initialconsumer
surplus
Quantity
(b) Consumer Surplus at Price P
Price
0
Demand
A
BC
D EF
P1
Q1
P2
Q2
Consumer surplusto new consumers
Additional consumersurplus to initial consumers
12
Producer Surplus
Table 2 The Costs of Four Possible Sellers
Copyright©2004 South-Western
14
The Supply Schedule and the Supply Curve
Figure 4 The Supply Schedule and the Supply Curve
Figure 5 Measuring Producer Surplus with the Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Quantity ofHouses Painted
Price ofHouse
Painting
500
800
$900
0
600
1 2 3 4
(a) Price = $600
Supply
Grandma’s producersurplus ($100)
Figure 5 Measuring Producer Surplus with the Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Quantity ofHouses Painted
Price ofHouse
Painting
500
800
$900
0
600
1 2 3 4
(b) Price = $800
Georgia’s producersurplus ($200)
Totalproducersurplus ($500)
Grandma’s producersurplus ($300)
Supply
Figure 6 How the Price Affects Producer Surplus
Copyright©2003 Southwestern/Thomson Learning
Producersurplus
Quantity
(a) Producer Surplus at Price P
Price
0
Supply
B
A
C
Q1
P1
Figure 6 How the Price Affects Producer Surplus
Copyright©2003 Southwestern/Thomson Learning
Quantity
(b) Producer Surplus at Price P
Price
0
P1B
C
Supply
A
Initialproducersurplus
Q1
P2
Q2
Producer surplusto new producers
Additional producersurplus to initialproducers
D EF
20
Market Efficiency
Figure 7 Consumer and Producer Surplus in the Market Equilibrium
Copyright©2003 Southwestern/Thomson Learning
Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
22
Efficiency
The property of resource allocation of maximizing the total surplus received by all members of society.
Total surplus = CS + PS
= (value to buyers – amount paid by buyers)
+ (amount received by sellers – cost to sellers)
= value to buyers – cost to sellers
23
Market for Organs
“The average wait for a kidney transplant is 3.5 years and about 6,000 Americans die every year because a kidney cannot be found.”
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End of Chapter Questions
25
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9. Consider how health insurance affects the quantity of health care services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance only pays $20 out-of-pocket when she chooses to have an additional procedure performed.
a) Draw a demand curve showing the quantity at $100 and $20. What are the welfare implications if the cost to society of an additional procedure is $100.
b) Given your analysis, why might the use of care be excessive.
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10. Many parts of CA experienced a severe drought in the late 1980’s and early 1990’s.
a) Use S&D to show the effect of a drought on the equilibrium price and quantity of water.
b) Many communities did not allow the price of water to change. Show the effect.
c) LA required all residents to cut consumption by 10%. Is this policy efficient?
d) What are the efficiency implications of allowing the price to adjust? What are the equity implications.
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