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Chapter 7: Consumers, Producers, and the Efficiency of Markets Ch. 7: Consumers, Producers, and the Efficiency of Markets Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Are Emily and Greg More Employable than Lakisha and Jamal? A Field Experiment on Labor Market Discrimination Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Welfare economics: the study of how the allocation of resources affects economic well-being. Chapter 7: Consumers, Producers, and the Efficiency of Markets Willingness to pay (WTP): maximum amount a buyer is willing to pay for a good (buyerβs value of the good). How do we construct a demand schedule/curve from WTPs? Chapter 7: Consumers, Producers, and the Efficiency of Markets Willingness to pay (WTP): maximum amount a buyer is willing to pay for a good (buyerβs value of the good). Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Chapter 7: Consumers, Producers, and the Efficiency of Markets Willingness to pay (WTP): maximum amount a buyer is willing to pay for a good (buyerβs value of the good). Demand schedule Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Price of 2 ice cream scoops Who buys πΈπ $1 Everyone except bill 6 $2 Everyone except bill and jimmy 5 $3 George, Ronald, Barack and Richard 4 $4 Same 4 $5 Ronald, Barack, Richard 3 $6 Ronald and Richard 2 $7 Richard 1 Chapter 7: Consumers, Producers, and the Efficiency of Markets Willingness to pay (WTP): maximum amount a buyer is willing to pay for a good (buyerβs value of the good). Demand schedule Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Demand curve Price of 2 ice cream scoops Who buys πΈπ $1 Everyone except bill 6 $2 Everyone except bill and jimmy 5 $3 George, Ronald, Barack and Richard 4 $4 Same 4 $5 Ronald, Barack, Richard 3 $6 Ronald and Richard 2 $7 Richard 1 P $7 $6 $5 $4 $3 $2 $1 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Willingness to pay (WTP): maximum amount a buyer is willing to pay for a good (buyerβs value of the good). Demand schedule Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Demand curve Price of 2 ice cream scoops Who buys πΈπ $1 Everyone except bill 6 $2 Everyone except bill and jimmy 5 $3 George, Ronald, Barack and Richard 4 $4 Same 4 $5 Ronald, Barack, Richard 3 $6 Ronald and Richard 2 $7 Richard 1 P $7 $6 $5 $4 $3 $2 $1 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Willingness to pay (WTP): maximum amount a buyer is willing to pay for a good (buyerβs value of the good). Demand schedule Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Demand curve Price of 2 ice cream scoops Who buys πΈπ $1 Everyone except bill 6 $2 Everyone except bill and jimmy 5 $3 George, Ronald, Barack and Richard 4 $4 Same 4 $5 Ronald, Barack, Richard 3 $6 Ronald and Richard 2 $7 Richard 1 P $7 $6 $5 $4 $3 $2 $1 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Why the staircase demand curve? Does it violate the law of demand? Demand schedule Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Demand curve Price of 2 ice cream scoops Who buys πΈπ $1 Everyone except bill 6 $2 Everyone except bill and jimmy 5 $3 George, Ronald, Barack and Richard 4 $4 Same 4 $5 Ronald, Barack, Richard 3 $6 Ronald and Richard 2 $7 Richard 1 P $7 $6 $5 $4 $3 $2 $1 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Demand schedule Consumer preferences Name Willingness to Pay (WTP) for 2 scoops of ice cream George $3 Ronald $6 Jimmy $1 Barack $5 George jr. $2 Richard $8 Bill $0 Demand curve Price of 2 ice cream scoops Who buys πΈπ $1 Everyone except bill 6 $2 Everyone except bill and jimmy 5 $3 George, Ronald, Barack and Richard 4 $4 Same 4 $5 Ronald, Barack, Richard 3 $6 Ronald and Richard 2 $7 Richard 1 P $7 $6 $5 $4 $3 $2 $1 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets P $7 Demand curve for ice cream $6 $5 $4 $3 $2 $1 $0 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets P $7 Demand curve for ice cream Richard WTP - $8 (off the chart) $6 Ronald WTP - $6 $5 Barack WTP - $5 $4 $3 George WTP - $3 $2 George Jr. WTP - $2 $1 Jimmy WTP - $1 $0 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets P $7 Demand curve for ice cream Richard WTP - $8 (off the chart) $6 The marginal buyer is the one that would leave the market if P was any higher Ronald WTP - $6 $5 Barack WTP - $5 At $3, George is the marginal buyer. $4 At $1, Jimmy is the marginal buyer. $3 At $6, Ronald is the marginal buyer. George WTP - $3 $2 George Jr. WTP - $2 $1 Jimmy WTP - $1 $0 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) P $7 $6 Demand curve for ice cream Richard WTP - $8 (off the chart) Consumer surplus = WTP - P Richardβs CS Market price of $5 Ronaldβs CS Ronald WTP - $6 Richard purchases and receives CS $8-$5 = $3 $5 Ronald purchases and receives CS $6 - $5 = $1 Barack WTP - $5 $4 Barack purchases and receives CS $5 - $5 = $0 Market consumer surplus = $3 + $1 = $4 $3 George WTP - $3 Barack is the marginal consumer! $2 George Jr. WTP - $2 $1 Jimmy WTP - $1 $0 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) P $7 Demand curve for ice cream Consumer surplus = WTP - P Richard WTP - $8 (off the chart) Market price of $4 $6 Richard purchases and receives CS $8 - $4 = $4 Richardβs CS Ronald WTP - $6 Ronaldβs CS $5 Ronald purchases and receives CS $6 - $4 = $2 Barackβs CS Barack WTP - $5 $4 Barack purchases and receives CS $5 - $4 = $1 George purchases and receives CS $4 - $4 = $0 Market consumer surplus = $4 + $2 + $1 = $7 $3 George WTP - $3 George is the marginal consumer! $2 George Jr. WTP - $2 $1 Jimmy WTP - $1 $0 0 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) Demand for Jimmy Johnβs sandwiches (per month) Price of a $12 sandwich Price = $6, what is the market consumer surplus? $9 $6 $3 0 0 50 150 100 Quantity of sandwiches 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) Demand for Jimmy Johnβs sandwiches (per month) Price of a $12 sandwich Price = $6, what is the market consumer surplus? $9 Market consumer surplus $6 $3 0 0 50 150 100 Quantity of sandwiches 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) Demand for Jimmy Johnβs sandwiches (per month) Price of a $12 sandwich ππππ π Market consumer surplus = ππ $9 ππππ = πππ ππππ π = ππ Price = $6, what is the market consumer surplus? Market consumer surplus is $300 $6 $3 0 0 50 150 100 Quantity of sandwiches 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) Demand for Jimmy Johnβs sandwiches (per month) Price of a $12 sandwich ππππ π Market consumer surplus = ππ $9 Price = $9, what is the market consumer surplus? Market consumer surplus is $75 $6 $3 0 0 50 150 100 Quantity of sandwiches 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus (CS): amount a buyer is willing to pay minus the amount the buyer actually pays (CS = WTP β P) Demand for Jimmy Johnβs sandwiches (per month) Price of a $12 sandwich ππππ π Market consumer surplus = ππ $9 Price = $9, what is the market consumer surplus? Market consumer surplus is $75 Consumer surplus decreases with higher prices! $6 $3 0 0 50 150 100 Quantity of sandwiches 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Producer surplus (CS): amount a seller actually receives minus the amount the seller is willing to accept (CS = P β OC ) Supply schedule Supply curve Sellers costs Name Opportunity cost of producing 2 scoops of ice cream Ben and Jerryβs $1 Breyers $2 Wal Mart $3 Albertsons $4 Girl Scouts of America $5 Safeway Select $6 Dairy Queen $7 Price of 2 ice cream scoops Who provides/sells $1 Ben and Jerryβs 1 $2 Breyerβs and B & Jβs. 2 $3 Breyerβs, B and Jβs, Wal Mart 3 $4 Everyone except GSA, Safeway, DQ 4 $5 Everyone except Safeway, DQ 5 $6 Everyone except DQ 6 $7 Everyone 7 πΈπ P $7 $6 $5 $4 $3 $2 $1 0 1 2 3 4 5 6 7 8 ππ Chapter 7: Consumers, Producers, and the Efficiency of Markets Producer surplus (CS): amount a seller actually receives minus the amount the seller is willing to accept (CS = P β OC ) P $7 Supply curve for ice cream $6 $5 $4 $3 $2 Producer surplus = P β Opp. Cost $1 $00 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Producer surplus (CS): amount a seller actually receives minus the amount the seller is willing to accept (CS = P β OC ) P $7 Supply curve for ice cream $6 $5 $4 $3 Producer Surplus $2 πππ π What is producer surplus if P = $3? = $π. π $1 $00 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Producer surplus (CS): amount a seller actually receives minus the amount the seller is willing to accept (CS = P β OC ) P $7 Supply curve for ice cream $6 $5 $4 $3 Producer Surplus $2 πππ π What is producer surplus if P = $3? = $π. π Market producer surplus is $4.5 $1 $00 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Producer surplus (CS): amount a seller actually receives minus the amount the seller is willing to accept (CS = P β OC ) P $7 Supply curve for ice cream $6 $5 Producer Surplus $4 πππ π = $ππ $3 $2 What is producer surplus if P = $6? Market producer surplus is $18 $1 $00 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Producer surplus (CS): amount a seller actually receives minus the amount the seller is willing to accept (CS = P β OC ) P $7 Supply curve for ice cream $6 $5 Producer Surplus $4 πππ π = $ππ $3 What is producer surplus if P = $6? $2 Market producer surplus is $18 $1 $00 Producer surplus increases with price! 1 2 3 4 5 6 7 8 ππ· Chapter 7: Consumers, Producers, and the Efficiency of Markets Consumer surplus, Producer surplus and total surplus: amount a buyer is willing to pay minus the amount the buyer actually pays β’ CS = (value to buyers) - (amount paid by buyers) = buyersβ gain from participating in market β’ PS = (amount received by sellers) - (cost to sellers) = sellersβ gain from participating in market β’ Total surplus = CS + PS = total gains from trade in a market = value to buyers - cost to sellers Chapter 7: Consumers, Producers, and the Efficiency of Markets Efficiency: An allocation of resources is efficient if it maximizes total surplus. Efficiency means β’ The goods are consumed by the buyers who value them most highly. β’ The goods are produced by the producers with the lowest costs. β’ Raising or lowering teh quantity of a good would not increase total surplus. Chapter 7: Consumers, Producers, and the Efficiency of Markets Checking a market for efficiency Price of a kg of raw $40 opium Raw opium market in Afghanistan Demand Supply $30 Consumer surplus $20 Producer surplus Is this market efficient? $10 0 0 50 100 150 Quantity of raw opium sold 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Checking a market for efficiency Price of a kg of raw $40 opium Raw opium market in Afghanistan Demand Supply $30 Consumer surplus Efficiency: condition 1 Who consumes the good? $20 Producer surplus Every buyer who has a WTP >$20. That that value the good the most consume it. $10 0 0 50 100 150 Quantity of raw opium sold 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Checking a market for efficiency Price of a kg of raw $40 opium Raw opium market in Afghanistan Demand Supply $30 Consumer surplus Efficiency: condition 2 Who produces the good? $20 Every seller who has a cost < $20 produces. Producer surplus Lowest cost sellers produce. $10 0 0 50 100 150 Quantity of raw opium sold 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Checking a market for efficiency Price of a kg of raw $40 opium Raw opium market in Afghanistan Demand Supply $30 Consumer surplus $30, cost to producer > $20 Producer surplus $10 0 0 50 $10, value to buyer 100 150 Quantity of raw opium sold Efficiency: condition 3 Does equilibrium quantity maximize total surplus? Yes, any additional unit produces would cost the marginal producer more than it would benefit the marginal consumer. 200 Chapter 7: Consumers, Producers, and the Efficiency of Markets Checking a market for efficiency Price of a kg of raw $40 opium Raw opium market in Afghanistan Demand Supply $30, value to buyer $30 Consumer surplus Efficiency: condition 3 Does equilibrium quantity maximize total surplus? > $20 Producer surplus $10 0 Yes, any additional unit produces would cost the marginal producer more than it would benefit the marginal consumer. $10, cost to producer 0 50 100 150 Quantity of raw opium sold 200