Principles of economics 2nd by mankiw chapter 07

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Consumers, Producers, and the Efficiency of Markets Chapter Copyright © 2001 by Harcourt, Inc All rights reserved.   Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777 Revisiting the Market Equilibrium 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 is determined by welfare economics  Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being   Buyers and sellers receive benefits from taking part in the market The equilibrium in a market maximizes the total welfare of buyers and sellers Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc 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 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Welfare Economics  Consumer surplus measures economic welfare from the buyer’s side  Producer surplus measures economic welfare from the seller’s side Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Consumer Surplus  Willingness to pay is the maximum price that a buyer is willing and able to pay for a good  It measures how much the buyer values the good or service Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Consumer Surplus Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Four Possible Buyers’ Willingness to Pay Buyer Willingness to Pay John $100 Paul 80 George 70 Ringo 50 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Consumer Surplus The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Four Possible Buyers’ Willingness to Pay Price Buyer Quantity Demanded More than $100 None $80 to $100 John $70 to $80 John, Paul $50 to $70 John, Paul, George $50 or less Ringo Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Summary  Producer surplus measures the benefit sellers get from participating in a market  Producer surplus can be computed by finding the area below the price and above the supply curve Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Summary  The equilibrium of demand and supply maximizes the sum of consumer and producer surplus  This is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently  Markets not allocate resources efficiently in the presence of market failures Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Summary  An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient  Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Graphical Review Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Measuring Consumer Surplus with the Demand Curve Price of Album John’s willingness to pay $100 Paul’s willingness to pay 80 70 George’s willingness to pay Ringo’s willingness to pay 50 Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Albums Measuring Consumer Surplus with the Demand Curve Price of Album Price = $80 $100 John’s consumer surplus ($20) 80 70 50 Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Albums Measuring Consumer Surplus with the Demand Curve Price of Album Price = $70 $100 John’s consumer surplus ($30) 80 70 50 Paul’s consumer surplus ($10) Total consumer surplus ($40) Demand Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Albums Copyright © 2001 by Harcourt, Inc All rights reserved How the Price Affects Consumer Surplus Price P1 P2 A Initial consume r surplus B D C E Additiona l consumer surplus to initial consumer Q1 s F Consumer surplus to new consumers Demand Q2 Quantity Producer Surplus and the Supply Curve Price of House Painting Supply Mary’s cost Frida’s cost $900 800 Georgia’s cost Grandma’s cost 600 500 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Houses Painted Measuring Producer Surplus with the Supply Curve Price of House Painting Price = $600 Supply $900 800 600 500 Grandma’s producer surplus ($100) Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Houses Painted Measuring Producer Surplus with the Supply Curve Price of House Painting $900 Price = $800 Supply Total producer surplus ($500) 800 Georgia’s producer surplus ($200) 600 500 Grandma’s producer surplus ($300) Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity of Houses Painted How Price Affects Producer Surplus Price Additional producer surplus to initial producers P2 D P1 B Initial Produce r surplus E Supply F C Producer surplus to new producers A Q1 Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Q2 Quantity Evaluating the Market Equilibrium Price A D Equilibrium price Supply E B Demand C Equilibrium quantity Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity Consumer and Producer Surplus in the Market Equilibrium Price A D Equilibrium price Supply Consumer surplus E Producer surplus B Demand C Equilibrium quantity Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Quantity The Efficiency of the Equilibrium Quantity Price Supply Value to buyer s Cost to seller s Cost to seller s Equilibrium quantity Value to buyer s Demand Quantity Value to buyers is Value to buyers is less greater than cost to than cost to sellers Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc sellers ... Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being   Buyers... total welfare of buyers and sellers? Market equilibrium reflects the way markets allocate scarce resources  Whether the market allocation is desirable is determined by welfare economics  Harcourt,... equilibrium in a market maximizes the total welfare of buyers and sellers Harcourt, Inc items and derived items copyright © 2001 by Harcourt, Inc Welfare Economics Equilibrium in the market results
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