UMD ECON 200 - Consumers, Producers, and the Efficiency of Markets

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A seller will produce and sell a good (or service) only if the price exceeds his or her costCost is a measure of willingness to sell.NameCostJack10Janet20Juan35We can derive the supply schedule from the cost dataPQ^(s)0-10010-20120-35235+3Marginal 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 lowerProducer SurplusThe amount a seller is paid – the cost of productionWe’ll sometimes shorted this term to PSTotal 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 CurveSuppose p=$40At q=15k, MSC=$30 and PS=$10Base= qs at $40= 25Height=$40-$15=$25PS= 1/2xbH25 25 1/2312.50Suppose P falls from $40 to $30PS=1/2 15 15112.50Two Reasons for Fall In PS:1.Fall in PS due to sellers leaving market2.Falll in PS due to remaining sellers getting lower PTrapezoid- a quadrilateral with only one pair of parallel sides.A=1/2 h (a+b)Three Important Questions about a market for a specific good:How much of the good is produced?In a competitive market with no government interference it is the amount where the quantityWho produces the good?Sellers with the lowest cost will produce the goodWho consumes 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 resources.Whether the market allocation is desirable is determined by using welfare economics.Consider a market demand curve for a specific good:Demand curve shows willingness to pay while the supply curve shows the willingness to supply.Consumer SurplusProducer SurplusConsumer surplus is a measure of the benefit to consumers in the market exchange (for that specific good)Producer surplus is a measure of the benefit to producers in the market exchange (for that specific good)Area above market price and below demand curve is consumer surplus.Area above supply curve and below market price is the producer surplus.Consumer surplus is a measure of consumer well-being in dollar termsProducer surplus is a measure of producer well being in dollar terms.Is the market’s allocation of resources desirable?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 surplusCS= value of buyers-amount paid by buyersPS= amount received by sellers-cost to sllrsAmount paid by buyers= Amount received by sellers.TS= value of buyers- cost to sellers1. Q is greater than eqmQMarginal Cost exceeds Marginal BenefitCan increase total surplus by reducing QAn output level like this does not maximize total surplus.2. Q is less than equilibrium quantityMarginal Cost is less than Marginal BenefitCan increase total surplus by increasing QAn output level like this does not maximize total surplus.3. The Equilibrium quantity maximizes total surplusA 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.welfare economicsthe study of how the allocation of resources affects economic well-beingThe equilibrium of supply and demand in a market maximizes the total benefits received by buyers and sellers.7-1 Consumer Surpluswillingness to pay -the maximum amount that a buyer will pay for a goodConsumer surplus- the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for itTotal Consumer Surplus- adding up all the CSDemand schedule is derived from the willingness to pay from all the possible buyers.The price given by the demand curve shows the willingness to pay of the marginal buyer,the buyer who would leave the market first if the price were any higherThe area below the demand curve and above the price measures the consumer surplus in a market.the height of the demand curve measures the value buyers place on the good, as measured by their willingness to pay for it.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.Consumers, Producers, and the Efficiency of Markets10/18/2012- 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.Name CostJack 10Janet 20Juan 35- We can derive the supply schedule from the cost dataP Q^(s)0-10 010-20 120-35 235+ 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 Surpluso The amount a seller is paid – the cost of production o We’ll sometimes shorted this term to PSo 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 Curveo 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 312.50o Suppose P falls from $40 to $30  PS=1/2 15 15 112.50o Two Reasons for Fall In PS:o 1.Fall in PS due to sellers leaving marketo 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? Sellers with the lowest cost will produce the goodo Who consumes 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 resources.- Whether the market allocation is desirable is determined by using welfare economics. - Consider a market demand curve for a specific good:o Demand curve shows


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UMD ECON 200 - Consumers, Producers, and the Efficiency of Markets

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