CHAPTER 5 CONSUMER DEMAND

1
Efficiency
and Equity
2
Definitions

• Efficient allocation
• Occurs when we produce the goods and services
  that people value the most
• Marginal benefit
• The benefit a person gets from consuming one more
  unit of a good or service
• Marginal cost
• the opportunity cost of producing one more unit
  of a good or service

3
The Efficient Quantity of Pizza
25
MC
20
Marginal cost and marginal benefit (dollars worth
of goods and services)
15
10
5
MB
0 5 10 15 20
Quantity (thousands of pizzas per day)
4
Consumer Surplus

• the difference between what a consumer is willing
  to pay for a product and the price.

5
Consumer Surplus Individual
P
16
15
14
13
12
11
10
D
9
2
4
6
8
1
3
5
7
0
Q
6
Consumer Surplus
P
20
Consumer Surplus
19
18
17
16
15
Amount Paid
10
D
5
2
4
6
8
1
3
5
7
0
Q
7
Price Discrimination

• the same product, with the same costs of
  production, is sold at different prices to
  different consumers

8
Price Discrimination

• can be based on
• age
• time
• volume of purchases
• to be successful, must
• identify groups with different demands
• separate these groups
• ensure lower priced item isnt re-sold

9
Producer Surplus the price of a good minus the
opportunity cost to produce it
S MC
25
20
Price
15
10
5
0 5 10
Quantity
10
An Efficient Market
S
25
20
15
Price (dollars per pizza)
10
D
0 5 10 15 20
Quantity (thousands of pizzas per day)
11
Is the CompetitiveMarket Efficient?

• At the competitive equilibrium, marginal benefit
  to consumers of last unit purchased marginal
  cost to producers of supplying that last unit.

At the competitive equilibrium, the sum of
consumer surplus and producer surplus is
maximized.
12
Underproduction
S
25
20
Price (dollars per pizza)
15
10
5
D
0 5 10 15 20
Quantity (thousands of pizzas per day)
13
Overproduction
S
25
20
15
Price (dollars per pizza)
10
5
D
0 5 10 15 20
Quantity (thousands of pizzas per day)
14
Sources of Inefficiency

• Price ceilings and floors
• Taxes, subsidies, and quotas
• Monopoly
• Public goods
• External costs and benefits
• High transaction costs

When the market is prevented from working
efficiently there is underproduction or
overproduction
15
Is the Competitive Market Fair?

• Two broad approaches
• Its not fair if the result isnt fair.
• Why should daycare workers earn so little?
• Its not fair if the rules arent fair.
• Affirmative action is unfair to young men!

16
Its Not Fair If the Result Isnt Fair

• Utilitarianism
• Equality is fair and efficient
• Transfer income so no rich and no poor
• The problem with utilitarianism is
• Income taxes reduce incentive to work, so total
  pie shrinks
• Administrative costs of transferring income

17
Its Not Fair If the Rules Arent Fair

• symmetry principle
• the requirement that people in similar situations
  be treated similarly.
• Requires
• Laws that establish and protect property are
  enforced
• Private property can be transferred only by
  voluntary exchange

18
Market Alternatives

• Command
• Majority rule
• Contest
• First-come, First-served
• Lottery
• Personal characteristics
• Force