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HUTECH Institute of International Education Consumers, Producers and Market Efficiency Consumers, Producers and Market Efficiency 5 1 5 2 5 3 CONSUMER SURPLUS PRODUCER SURPLUS MARKET EFFICIENCY Topics[.]
Consumers, Producers and Market Efficiency Topics to be discussed HUTECH Institute of International Education 5.1 CONSUMER SURPLUS 5.2 PRODUCER SURPLUS 5.3 MARKET EFFICIENCY Consumers, Producers and Market Efficiency Welfare Economics ▪ The allocation of resources refers to: ▪ how much of each good is produced ▪ which producers produce it ▪ which consumers consume it ▪ Welfare economics studies how the allocation of resources affects economic well-being HUTECH Institute of International Education Consumers, Producers and Market Efficiency 5.1 CONSUMER SURPLUS A buyer’s willingness to pay (WTP) for a good is the maximum amount the buyer will pay for that good WTP measures how much the buyer values the good Customer Anthony WTP $250 Chad 175 Flea 300 John 125 HUTECH Institute of International Education Q: If price of iPad is $200, who will buy an iPod, and what is quantity demanded? A: Anthony & Flea will buy an iPad, Chad & John will not Hence, Qd = when P = $200 Consumers, Producers and Market Efficiency WTP and the Demand Curve Derive the demand schedule: Customer Anthony P (price of iPod) who buys Qd $301 & up nobody 251 – 300 Flea 176 – 250 Anthony, Flea Chad, Anthony, 126 – 175 Flea WTP $250 Chad 175 Flea 300 John 125 – 125 HUTECH Institute of International Education John, Chad, Anthony, Flea Consumers, Producers and Market Efficiency WTP and the Demand Curve P $350 $300 P Qd $250 $200 $301 & up 251 – 300 $150 176 – 250 $100 $50 126 – 175 – 125 $0 Q HUTECH Institute of International Education Consumers, Producers and Market Efficiency WTP and the Demand Curve P Flea’s WTP $350 $300 Anthony’s WTP $250 $200 Chad’s WTP John’s WTP $150 $100 $50 $0 At any Q, the height of the D curve is the WTP of the marginal buyer, the buyer who would leave the market first if P were any higher Q HUTECH Institute of International Education Consumers, Producers and Market Efficiency Consumer Surplus (CS) Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays CS = WTP – P name WTP Anthony $250 Chad 175 Flea 300 John 125 HUTECH Institute of International Education Suppose P = $260 Flea’s CS = $300 – 260 = $40 The others get no CS because they not buy an iPod at this price Total CS = $40 → CS measures buyers’ benefit from participating in a market Consumers, Producers and Market Efficiency Consumer Surplus & Demand curve P CS equals the area below Demand curve and above the price Recall: Area of a triangle equals: S= ½ x base x height CS = ½ x 15 x $30 = $225 HUTECH Institute of International Education` $ 60 The demand for shoes 50 h 40 30 20 10 D 0 Q 10 15 20 25 30 Consumers, Producers and Market Efficiency How a higher price reduce CS? P If P rises to $40, CS = ½ x 10 x $20 = $100 60 Two reasons for the fall in CS 40 Fall in CS due to remaining buyers paying higher P 50 Fall in CS due to buyers leaving market 30 20 10 D 0 HUTECH Institute of International Education` Q 10 15 20 25 30 Consumers, Producers and Market Efficiency Example A Find marginal buyer’s WTP at Q = 10 B Find CS for P = $30 C If P falls to $20, how much will CS increase? demand curve P 50 $ 45 40 35 30 25 20 15 10 0 HUTECH Institute of International Education` 10 15 20 Q 25 Consumers, Producers and Market Efficiency ... $ 350 $300 P Qd $ 250 $200 $301 & up 251 – 300 $ 150 176 – 250 $100 $50 126 – 1 75 – 1 25 $0 Q HUTECH Institute of International Education Consumers, Producers and Market Efficiency WTP and the Demand... 126 – 1 75 Flea WTP $ 250 Chad 1 75 Flea 300 John 1 25 – 1 25 HUTECH Institute of International Education John, Chad, Anthony, Flea Consumers, Producers and Market Efficiency WTP and the Demand Curve... $200 Consumers, Producers and Market Efficiency WTP and the Demand Curve Derive the demand schedule: Customer Anthony P (price of iPod) who buys Qd $301 & up nobody 251 – 300 Flea 176 – 250 Anthony,