Download Ch.7 Review Market Equilibrium

Market Equilibrium
in
Perfect Competition
What do buyers and sellers get out of the market?
And
Why do economists think this is efficient?
Equilibrium (cont’d)
What does EQUILIBRIUM mean?
• At the market equilibrium price:
• Quantity demanded by consumers = quantity
supplied by firms/producers/sellers
• Without a change in any of the ceterius paribus
conditions, the price will remain unchanged
Consumer Surplus
Demand Curve is
Also Marginal Value
and Avg Revenue
Average Price (price
per unit)
Demand Curve
$12
$10
$8
$6
$4
$2
$0
CS
Amount Paid
1
2
3
4
5
6
7
Quantity Demanded
Total WTP =
CS + Amt Paid
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What Do Sellers Get Out of This?
• Producer Surplus
• The difference between what they get paid (total revenues) and what it costs
them
• Total Revenues
• > = Average Price x Quantity Purchased
• Total Costs
• > = Sum of Marginal Costs up to the amount supplied (QS)
• Or = the area under the supply curve up to Qs
What is the Value of the Market
• Value of the market
• To Consumers = Consumer Surplus
• To Producers = Producer Surplus
• Value equals the sum of both CS and PS
Market Efficiency
 Evaluating the market equilibrium
 Market outcomes
1. Free markets allocate the supply of goods to the buyers who value them
most highly

Measured by their willingness to pay
2. Free markets allocate the demand for goods to the sellers who can produce
them at the least cost
 Only produce if you are paid as much (or more) than product costs to make (MC)
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Market Efficiency
 Evaluating the market equilibrium
◦ Social planner
 Cannot increase economic well-being by
 Changing the allocation of consumption among buyers
 Changing the allocation of production among sellers
 Cannot rise total economic well-being by
 Increasing or decreasing the quantity of the good
3. Free markets produce the quantity of goods that maximizes the sum of
consumer and producer surplus
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The efficiency of the equilibrium quantity
Price
Supply
Cost
to
sellers
Value
to
buyers
Demand
Value
to
buyers
Cost
to
sellers
0
Q1
Equilibrium
quantity
Value to buyers is greater
than cost to sellers
Q2
Quantity
Value to buyers is less
than cost to sellers
At quantities less than the equilibrium quantity, such as Q1, the value to buyers exceeds the cost to
sellers. At quantities greater than the equilibrium quantity, such as Q2, the cost to sellers exceeds
the value to buyers. Therefore, the market equilibrium maximizes the sum of producer and
consumer surplus.
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Market Efficiency
• Evaluating the market equilibrium
• Equilibrium outcome
• Efficient allocation of resources
• Consumers:
• Goods to those who value it most (MV >= P)
• Suppliers
• Goods produced by those with least costs/most efficient production (P>MC)
• Efficient use of resources
• Produce only goods whose value is >= cost of using the resources
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