ECON 221 Lecture 6Outline of Last LectureI. Supply CurvesII. Demand CurvesIII. Curve ShiftsOutline of Current Lecture I. EfficiencyII. Willingness to PayIII. Consumer SurplusIV. Producer SurplusCurrent LectureI. Competitive markets lead to “good” outcomes.A. Lots of buyersB. Lots of sellersC. Selling the exact same item – must accept the price in the marketII. Analyze impact of government intervention in marketsA. What happens to price and quantities?B. Who benefits and who suffers?III. “Good” outcome -> market equilibrium is EFFICIENT.A. No missed opportunity to make someone better off.IV. Example:A. I have 2 chocolate bars to give awayB. Ann loves chocolate, Bob is allergicC. Giving one to Ann and one to Bob is not efficient; giving both to Ann would be the most efficient choice. D. Efficiency does not always equal fairness. V. Example:A. I have 4 apples. Ann and Bob both like apples, unused apples go bad and aren’t eaten by anyone.B. Which of the following outcomes are efficient?1. Give both 2 apples2. Give Ann 3 apples and Bob 1These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.3. Give Bob 4 apples and Ann none4. Give Ann 3 applesVI. In markets, prices adjust until we reach equilibrium – everyone who wants to buy is able to and everyone who wants to sell is able to A. No missed sales opportunities and no wasted productionVII. Equilibrium outcome: Nobody wants to change what they are doing given what everyone else is doing. A. Has to do with the choices individuals are makingVIII. Efficient outcome: there is no way to make anyone better off. IX. Ways to measure hoe much people are benefiting from participating in markets.A. Consumer surplus (CS)B. Producer surplus (PS)C. Total surplus = CS + PSX. Show competitive market equilibrium max’s total surplusXI. Willingness – to – payA. Willingness to pay is a measure of how beneficial one thinks something isB. WTP is built into demand curves XII. CONSUMER SURPLUSA. “net benefit” received if an individual purchases and consumes a good is: WTP – Price = “(Individual) Consumer Surplus” B. Total consumer surplus is just the sum of everybody’s consumer surplus.C. Always represented by area UNDER demand curve but ABOVE price (up until the quantity where consumers stop buying.) XIII. When the price of a good increases, the quantity of consumer surplus decreasesA. CS dropped for two reasons: 1. Fewer consumers2. Less value amongst remaining consumers XIV. PRODUCER SURPLUS – “Benefit – Cost” XV. Same from producers, but with different definitions of benefit and cost, specifically: A. Price Received – Cost = “(Individual) Producer Surplus”XVI. Total producer surplus A. Sum of all individual producer surplusesB. Represented by area ABOVE supply curve, but BELOW price (up until point where producers stop selling) XVII. HOLDING SUPPLY CONSTANT: A price increase makes producers better off – so we see an increase in producer surplusXVIII. Combining PS and CSA. Total Surplus = CS + PS XIX. Example:A. Suppose this is a market for hot dog bunsB. The price of hot dog goes upC. What happens in out market?D. Less demand for hot dog buns due to them being complements XX. Connect CS and PS with “efficiency” XXI. EquilibriumA. We can now use these ideas to think about the efficiency of market equilibria.B. Not missing any opportunity to make some people better offC. Is there any other outcome that would result in a higher total surplus?XXII. EfficiencyA. Markets exist to decided how to allocate resources – to decide which consumers get to consume stuff and which sellers get to earn moneyB. The market chooses buyers who value a good the most and sellers who produce at the lowest cost C. Impossible to re-arrange consumption and production and achieve higher total surplusXXIII. Highlights A. Consumer surplus 1. sum of benefit all consumers receive 2. (WTP – Price) B. Producer surplus1. Sum of benefit all producers receive 2. (Price – Cost)C. TS = CS + PSD. Competitive markets are efficient in the sense that they maximize total surplus 1. No way to reallocate consumption or production that increases total