Consumers Producers and the Efficiency of Markets 10 18 2012 A seller will produce and sell a good or service only if the price exceeds his or her cost Cost is a measure of willingness to sell We can derive the supply schedule from the cost data Name Jack Janet Juan P 0 10 10 20 20 35 35 Cost 10 20 35 Q s 0 1 2 3 Marginal Seller At q 1 2 and 3 the height of the lowest point on the supply curve is the cost for a seller who would leave the market if the price was any lower Producer Surplus o The amount a seller is paid the cost of production o We ll sometimes shorted this term to PS o Total PS the area of the region that is above the supply curve and under the horizontal line that is at the price level A Market with A Smooth Supply Curve o Suppose p 40 At q 15k MSC 30 and PS 10 Base qs at 40 25 Height 40 15 25 PS 1 2xbH 25 25 1 2 312 50 o Suppose P falls from 40 to 30 PS 1 2 15 15 112 50 o Two Reasons for Fall In PS o 1 Fall in PS due to sellers leaving market o 2 Falll in PS due to remaining sellers getting lower P Trapezoid a quadrilateral with only one pair of parallel sides o A 1 2 h a b Three Important Questions about a market for a specific good o How much of the good is produced In a competitive market with no government interference it is the amount where the quantity o Who produces the good o Who consumes the good Sellers with the lowest cost will produce the good The buyers who value the good most highly are the ones who consume it Is a free market s market operating without government interference allocation of resources desirable Or would a different allocation of resources make society better off Market Equilibrium reflects the way markets allocate scarce Whether the market allocation is desirable is determined by using resources welfare economics Consider a market demand curve for a specific good o Demand curve shows willingness to pay while the supply curve shows the willingness to supply Consumer Surplus Producer Surplus o Consumer surplus is a measure of the benefit to consumers in the market exchange for that specific good market price and below demand curve is consumer surplus surplus is a measure of consumer well being in dollar terms o Area above o Area above o Consumer o Producer o Producer surplus is a measure of the benefit to producers in the market exchange for that specific good supply curve and below market price is the producer surplus surplus is a measure of producer well being in dollar terms o Is the market s allocation of resources desirable o Would a different allocation of resources make society better off Use total surplus as a measure of society s well being What value of Q will maximize total surplus TS consumer surplus producer surplus CS value of buyers amount paid by buyers PS amount received by sellers cost to sllrs Amount paid by buyers Amount received by sellers TS value of buyers cost to sellers 1 Q is greater than eqmQ Marginal Cost exceeds Marginal Benefit Can increase total surplus by reducing Q An output level like this does not maximize total surplus 2 Q is less than equilibrium quantity Marginal Cost is less than Marginal Benefit Can increase total surplus by increasing Q An output level like this does not maximize total surplus 3 The Equilibrium quantity maximizes total surplus A competitive Market maximizes total surplus Government interference in markets lowers total surplus In a competitive market with no gvt interference equilibrium maximizes the sum of consumer and producer surplus This is as if an invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently 10 18 2012 welfare economics the study of how the allocation of resources affects economic well The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers 7 1 Consumer Surplus willingness to pay the maximum amount that a buyer will pay for a being good possible buyers of the marginal buyer any higher Consumer surplus the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it o Total Consumer Surplus adding up all the CS Demand schedule is derived from the willingness to pay from all the The price given by the demand curve shows the willingness to pay o the buyer who would leave the market first if the price were The area below the demand curve and above the price measures the consumer surplus in a market o the height of the demand curve measures the value buyers place on the good as measured by their willingness to pay for it o the total area below the demand curve and above the price is the sum of the consumer surplus of all buyers in the market for a good or service 10 18 2012
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