Unformatted text preview:

1Welfare AnalysisConsumer and Producer SurplusWelfare Analysis• To determine the impact on trade policies, we must determine how the participants in the economy are affected– Participants include:• Consumers (Households)• Producers (Firms)• GovernmentConsumer Surplus• Consumer Surplus (CS) is a method to determine the net benefit of consumption• Definition: “extra amount consumers are willing to pay for an item compared to what they have to pay”– Graphically, this is the area under the demand curve2Consumer Surplus II• Area under demand curve is the total value of consumption• At $10, value to consumer is (a+b+c), but consumer must pay (b+c)• So CS = aQD1501051015abdceabcPConsumer Surplus III• If the price falls to $5, then the total value of consumption is (a+b+c+d+e)• Consumer must pay (c+e)• So, CS= (a+b+d)15105abdceabcPde1510DQ0Producer Surplus (PS)• “Extra benefit” to producers• “What producers can charge” – “What producers willing to charge”• Graphically: Area between market price and supply curve3Producer Surplus II• Suppose the market price is $5• Firm is willing to sell unit 8 at $5, but for units 1-7, the firm is willing to sell each at a price less than $8• PS = x01SQP510815xyzProducer Surplus III• If the market price rises to $10, the firm is willing to sell at most 15 units.• For units 1-14, the firm is willing to sell at a price lower than $10• PS = (x+y+z)01SQP5815xyz10Market Equilibrium• A nation’s welfare can then be determined by the sum of consumer surplus (CS) and producer surplus (PS) (plus any government revenue)Welfare = CS + PS + GR• Note that an increase in market price decreases CS yet increases PS• So an increase in market price does not necessarily have a negative impact on the


View Full Document

WMU ECON 2010 - Welfare Analysis

Download Welfare Analysis
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Welfare Analysis and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Welfare Analysis 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?