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Consumer Surplus, Producer Surplus, and Market Efficiency

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Consumer Surplus, Producer Surplus, and Market Efficiency Figure Caption: Figure 4-2: Consumer Surplus in the Used-Textbook Market At a price of $30, Aleisha, Brad ... – PowerPoint PPT presentation

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Title: Consumer Surplus, Producer Surplus, and Market Efficiency


1
Consumer Surplus, Producer Surplus, and Market
Efficiency
2
Consumer Surplus and the Demand Curve
  • Example is the market for used textbooks,
    concentrating on the buyers.
  • The example is going to show that the demand
    curve is derived from peoples tastes or
    preferences and these tastes and preferences also
    determine how much they gain from the opportunity
    to buy used books.

3
Willingness to Pay
  • Maximum price at which he or she would buy a good
  • Individuals wont buy the good if it costs more
    than this among but eager to do so if it cost
    less
  • If the price is just equal to an individuals
    willingness to pay, he or she is indifferent
    between buying and not buying

4
The Demand Curve for Used Textbooks
Price of book
Aleisha
59
Potential buyers
Willingness to pay
59
Aleisha
Brad
45
Brad
45
35
Claudia
Claudia
25
35
Darren
10
Edwina
Darren
25
A consumers willingness to pay for a good is the
maximum price at which he or she would buy that
good.
10
Edwina
D
5
4
3
2
1
0
Quantity of books
5
Willingness to Pay
  • Not a smooth curve because it is only dealing
    with a small number of consumers
  • Each horizontal segment how much one is willing
    to pay
  • What is the quantity demanded at 59?
  • What is the quantity demanded at 45?

6
Willingness to Pay Consumer Surplus
  • Campus Bookstore makes used textbooks available
    at a price of 30. Who will buy books?
  • Do they gain from their purchase?

7
Consumer Surplus in the Used Textbook Market
Aleishas consumer surplus 59-3929
The total consumer surplus is given by the entire
shaded area - the sum of the individual consumer
surpluses of Aleisha, Brad, and Claudia - equal
to 29 15 5 49.

8
Willingness to Pay Consumer Surplus
  • Individual Consumer Surplus net gain that a
    buyer achieves from the purchase of a good
  • Whenever a buyer pays a price less than his or
    her willingness to pay, the buy achieves an
    individual consumer surplus
  • Total Consumer Surplus sum of the individual
    consumer surpluses achieved by all the buyers of
    a good
  • Aleisha, Brad and Claudia 29 15 5 49

9
Consumer Surplus
  • Refers to both individual and total consumer
    surplus
  • Total consumer surplus is equal to the area below
    the demand curve but above the price

The total consumer surplus generated by
purchases of a good at a given price is equal
to the area below the demand curve but above
that price
10
Changing Prices Affects Consumer Surplus
  • Textbook Example again..
  • BUTthe bookstore has now decided to sell used
    textbooks for 20 instead of 30. How much would
    this fall in price increase consumer surplus?

11
Consumer Surplus and a Fall in the Price of Used
Textbooks
12
Changing Prices Affects Consumer Surplus
  • The graph showed that when the price of a good
    falls, the area under the demand curve but not
    above the price (which is equal to total consumer
    surplus) increases

13
Producer Surplus and the Supply Curve
  • We have buyers of goods that would be willing to
    pay more for their purchase than the price they
    actually pay
  • Some sellers of a good would have been willing to
    sell it for less than the price they actually
    receive

14
Producer Surplus and the Supply Curve
  • Sellers cost lowest price at which a potential
    seller is willing to sell
  • What is Andrews cost? What is Bettys cost?

15
Producer Surplus and the Supply Curve
  • Since the students dont have to manufacture the
    books, does it cost the student who sells a book
    anything to make that book available for sale?
  • YES!
  • You wont have it later in your personal
    collection opportunity cost!
  • When saying cost of a good as a seller,
    referring to selling that good even if you dont
    spend any money to sell the good

16
Producer Surplus and the Supply Curve
  • Individual Producer Surplus the net gain, the
    difference between the price he actually gets and
    his cost, the minimum price at which he would
    have been willing to sell
  • Total Producer Surplus the total net gain to
    all sellers in the market
  • Producer Surplus refers to either the total or
    individual producer surplus

17
Producer Surplus in the Used Textbook Market
Total Producer Surplus is given by the entire
shaded area, the sum of the individual producer
surpluses of Andrew, Betty, and Carlos. 25
15 5 45
The total producer surplus from sales of a good
at a given price is the area above the supply
curve but below that price.
18
How Changing Price Affects Producer Surplus
  • When the price of a good rises, producer surplus
    increases through two ways
  • The gains of those who would have supplied the
    good even at the original, lower price and
  • The gains of those who are induced to supply the
    good by the higher price

19
A Rise in the Price Increases Producer Surplus
20
Consumer Surplus, Producer Surplus, and the Gains
from Trade
  • Total Surplus generated in a market is the total
    net gain to consumers and producers from trading
    in the market. It is the sum of the producer and
    the consumer surplus
  • This also shows there are gains from trade

21
Total Surplus
22
The Efficiency of Markets
  • Markets are usually efficient
  • Are they?
  • It is claimed that once the market has produced
    its gains from trade, there is no way to make
    some people better off without making ofther
    people worse off, except..under well-defined
    conditions

23
The Efficiency of Markets
  • A committee wants to improve on the market
    equilibrium by deciding who gets and who gives up
    a used textbook. The goal of the committee
    bypass the market outcome and come up with
    another arrangement that would produce higher
    total surplus

24
The Efficiency of Markets
  • Three ways to increase the total surplus
  • Reallocate consumption among consumers
  • Reallocate sales among sellers
  • Change the quantity traded

25
1. Reallocate consumption among consumers
  • Committee tries to increase total surplus by
    selling books to different consumers

26
2. Reallocate sales among sellers
  • Committee tried to increase total surplus by
    altering who sells their books, taking sales away
    from sellers who would have sold their books in
    the market equilibrium and instead compelling
    those who would not have sold their books in the
    market equilibrium to sell them

27
3. Change the quantity traded
  • Committee tries to increase total surplus by
    compelling students to trade either more books or
    fewer books than the market equilibrium quantity.

28
The Efficiency of Markets
  • Key Idea once this market is in equilibrium,
    there is no way to increase the gains from trade
  • An efficient market performs four important
    functions

29
The Efficiency of Markets
  • An efficient market performs four important
    functions
  • It allocates consumption of the good to the
    potential buyers who most value it, as indicated
    by the fact that they have the highest
    willingness to pay
  • It allocates sales to the potential sellers who
    most value the right to sell the good, as
    indicated by the fact that they have the lowest
    cost

30
The Efficiency of Markets
  1. It ensures that every consumer who makes a
    purchase values the good more than every seller
    who makes a sale, so that all transactions are
    mutually beneficial
  2. It ensures that every potential buyer who doesnt
    make a purchase values the good less than every
    potential seller who doesnt make a sale, so that
    no mutually beneficial transaction are missed

31
The Efficiency of Markets
  • Three caveats
  • Market can be efficient, it isnt necessarily
    fair
  • Markets sometimes fail
  • Even when market equilibrium maximizes total
    surplus, this does not mean that it results in
    the best outcome for every individual consumer
    and producer

32
The Efficiency of Markets
  • Efficiency is about how to achieve goals, not
    what those goals should be

33
Consumer Surplus, Producer Surplus, and Market
Efficiency Notes
34
Willingness to Pay
  • Individuals wont buy the good if it costs more
    than this among but eager to do so if it cost
    less
  • If the price is just equal to an individuals
    willingness to pay, he or she is indifferent
    between buying and not buying

35
The Demand Curve for Used Textbooks
Price of book
Aleisha
59
Potential buyers
Willingness to pay
59
Aleisha
Brad
45
Brad
45
35
Claudia
Claudia
25
35
Darren
10
Edwina
Darren
25
10
Edwina
D
5
4
3
2
1
0
Quantity of books
36
Willingness to Pay
  • What is the quantity demanded at 59?
  • What is the quantity demanded at 45?

37
Willingness to Pay Consumer Surplus
  • Campus Bookstore makes used textbooks available
    at a price of 30. Who will buy books?
  • Do they gain from their purchase?

38
Consumer Surplus in the Used Textbook Market
Aleishas consumer surplus 59-3929

39
Willingness to Pay Consumer Surplus
  • Individual Consumer Surplus net gain that a
    buyer achieves from the purchase of a good
  • Total Consumer Surplus sum of the individual
    consumer surpluses achieved by all the buyers of
    a good

40
Consumer Surplus
  • Refers to both individual and total consumer
    surplus

41
Consumer Surplus and a Fall in the Price of Used
Textbooks
42
Changing Prices Affects Consumer Surplus
  • The graph showed that when the price of a good
    falls, the area under the demand curve but not
    above the price (which is equal to total consumer
    surplus) increases

43
Producer Surplus and the Supply Curve
  • We have buyers of goods that would be willing to
    pay more for their purchase than the price they
    actually pay

44
Producer Surplus and the Supply Curve
  • Sellers cost lowest price at which a potential
    seller is willing to sell
  • What is Andrews cost? What is Bettys cost?

45
Producer Surplus and the Supply Curve
  • Since the students dont have to manufacture the
    books, does it cost the student who sells a book
    anything to make that book available for sale?
  • YES!

46
Producer Surplus and the Supply Curve
  • Individual Producer Surplus
  • Total Producer Surplus
  • Producer Surplus

47
Producer Surplus in the Used Textbook Market
48
How Changing Price Affects Producer Surplus
  • When the price of a good rises, producer surplus
    increases through two ways

49
A Rise in the Price Increases Producer Surplus
50
Consumer Surplus, Producer Surplus, and the Gains
from Trade
  • This also shows there are gains from trade

51
Total Surplus
52
The Efficiency of Markets
  • Markets are usually efficient
  • Are they?
  • It is claimed that once the market has produced
    its gains from trade, there is no way to make
    some people better off without making ofther
    people worse off, except..under well-defined
    conditions

53
The Efficiency of Markets
  • A committee wants to improve on the market
    equilibrium by deciding who gets and who gives up
    a used textbook. The goal of the committee
    bypass the market outcome and come up with
    another arrangement that would produce higher
    total surplus

54
The Efficiency of Markets
  • Three ways to increase the total surplus
  • Reallocate consumption among consumers
  • Reallocate sales among sellers
  • Change the quantity traded

55
1. Reallocate consumption among consumers
  • Committee tries to increase total surplus by
    selling books to different consumers

56
2. Reallocate sales among sellers
  • Committee tried to increase total surplus by
    altering who sells their books, taking sales away
    from sellers who would have sold their books in
    the market equilibrium and instead compelling
    those who would not have sold their books in the
    market equilibrium to sell them

57
3. Change the quantity traded
  • Committee tries to increase total surplus by
    compelling students to trade either more books or
    fewer books than the market equilibrium quantity.

58
The Efficiency of Markets
  • Key Idea once this market is in equilibrium,
    there is no way to increase the gains from trade
  • An efficient market performs four important
    functions

59
The Efficiency of Markets
  • An efficient market performs four important
    functions
  • It allocates consumption of the good to the
    potential buyers who most value it, as indicated
    by the fact that they have the highest
    willingness to pay
  • It allocates sales to the potential sellers who
    most value the right to sell the good, as
    indicated by the fact that they have the lowest
    cost

60
The Efficiency of Markets
  1. It ensures that every consumer who makes a
    purchase values the good more than every seller
    who makes a sale, so that all transactions are
    mutually beneficial
  2. It ensures that every potential buyer who doesnt
    make a purchase values the good less than every
    potential seller who doesnt make a sale, so that
    no mutually beneficial transaction are missed

61
The Efficiency of Markets
  • Three caveats
  • Market can be efficient, it isnt necessarily
    fair
  • Markets sometimes fail
  • Even when market equilibrium maximizes total
    surplus, this does not mean that it results in
    the best outcome for every individual consumer
    and producer

62
The Efficiency of Markets
  • Efficiency is about how to achieve goals, not
    what those goals should be
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