1、3 SUPPLY AND DEMAND II:MARKETS AND WELFARECopyright 2004 South-WesternConsumers,Producers,and the Efficiency of MarketsCopyright 2004 South-WesternREVISITING THE MARKET EQUILIBRIUM Do the equilibrium price and quantity maximize the total welfare of buyers and sellers?Market equilibrium reflects the
2、way markets allocate scarce resources.Whether the market allocation is desirable can be addressed by welfare economics.Copyright 2004 South-WesternWelfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being.Buyers and sellers receive benefits from
3、taking part in the market.The equilibrium in a market maximizes the total welfare of buyers and sellers.Copyright 2004 South-WesternWelfare Economics Equilibrium in the market results in maximum benefits,and therefore maximum total welfare for both the consumers and the producers of the product.Copy
4、right 2004 South-WesternWelfare Economics Consumer surplus measures economic welfare from the buyers side.Producer surplus measures economic welfare from the sellers side.Copyright 2004 South-WesternCONSUMER SURPLUS Willingness to pay is the maximum amount that a buyer will pay for a good.It measure
5、s how much the buyer values the good or service.Copyright 2004 South-WesternCONSUMER SURPLUS Consumer surplus is the buyers willingness to pay for a good minus the amount the buyer actually pays for it.Table 1 Four Possible Buyers Willingness to PayCopyright2004 South-WesternCopyright 2004 South-Wes
6、ternCONSUMER SURPLUS The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices.Copyright 2004 South-WesternThe Demand Schedule and the Demand CurveFigure 1 The Demand Schedule and the Demand CurveCopyright2003 Southwestern/Thomson Le
7、arningPrice ofAlbum0Quantity ofAlbumsDemand1234$100Johns willingness to pay80Pauls willingness to pay70Georges willingness to pay50Ringos willingness to payFigure 2 Measuring Consumer Surplus with the Demand CurveCopyright2003 Southwestern/Thomson Learning(a)Price=$80Price ofAlbum5070800$100Demand12
8、34Quantity ofAlbumsJohns consumer surplus($20)Figure 2 Measuring Consumer Surplus with the Demand CurveCopyright2003 Southwestern/Thomson Learning(b)Price=$70Price ofAlbum5070800$100Demand1234Totalconsumersurplus($40)Quantity ofAlbumsJohns consumer surplus($30)Pauls consumersurplus($10)Copyright 200
9、4 South-WesternUsing the Demand Curve to Measure Consumer Surplus The area below the demand curve and above the price measures the consumer surplus in the market.Figure 3 How the Price Affects Consumer SurplusCopyright2003 Southwestern/Thomson LearningConsumersurplusQuantity(a)Consumer Surplus at Pr
10、ice PPrice0DemandP1Q1BACFigure 3 How the Price Affects Consumer SurplusCopyright2003 Southwestern/Thomson LearningInitialconsumersurplusQuantity(b)Consumer Surplus at Price PPrice0DemandABCDEFP1Q1P2Q2Consumer surplusto new consumersAdditional consumersurplus to initial consumersCopyright 2004 South-
11、WesternWhat Does Consumer Surplus Measure?Consumer surplus,the amount that buyers are willing to pay for a good minus the amount they actually pay for it,measures the benefit that buyers receive from a good as the buyers themselves perceive it.Copyright 2004 South-WesternPRODUCER SURPLUS Producer su
12、rplus is the amount a seller is paid for a good minus the sellers cost.It measures the benefit to sellers participating in a market.Table 2 The Costs of Four Possible SellersCopyright2004 South-WesternCopyright 2004 South-WesternUsing the Supply Curve to Measure Producer Surplus Just as consumer sur
13、plus is related to the demand curve,producer surplus is closely related to the supply curve.Copyright 2004 South-WesternThe Supply Schedule and the Supply CurveFigure 4 The Supply Schedule and the Supply CurveCopyright 2004 South-WesternUsing the Supply Curve to Measure Producer Surplus The area bel
14、ow the price and above the supply curve measures the producer surplus in a market.Figure 5 Measuring Producer Surplus with the Supply CurveCopyright2003 Southwestern/Thomson LearningQuantity ofHouses PaintedPrice ofHousePainting500800$90006001234(a)Price=$600SupplyGrandmas producersurplus($100)Figur
15、e 5 Measuring Producer Surplus with the Supply CurveCopyright2003 Southwestern/Thomson LearningQuantity ofHouses PaintedPrice ofHousePainting500800$90006001234(b)Price=$800Georgias producersurplus($200)Totalproducersurplus($500)Grandmas producersurplus($300)SupplyFigure 6 How the Price Affects Produ
16、cer SurplusCopyright2003 Southwestern/Thomson LearningProducersurplusQuantity(a)Producer Surplus at Price P Price0SupplyBACQ1P1Figure 6 How the Price Affects Producer SurplusCopyright2003 Southwestern/Thomson LearningQuantity(b)Producer Surplus at Price P Price0P1BCSupplyAInitialproducersurplusQ1P2Q
17、2Producer surplusto new producersAdditional producersurplus to initialproducersDEFCopyright 2004 South-WesternMARKET EFFICIENCY Consumer surplus and producer surplus may be used to address the following question:Is the allocation of resources determined by free markets in any way desirable?Copyright
18、 2004 South-WesternMARKET EFFICIENCYConsumer Surplus=Value to buyers Amount paid by buyersandProducer Surplus=Amount received by sellers Cost to sellersCopyright 2004 South-WesternMARKET EFFICIENCYTotal surplus=Consumer surplus+Producer surplusorTotal surplus=Value to buyers Cost to sellersCopyright
19、 2004 South-WesternMARKET EFFICIENCY Efficiency is the property of a resource allocation of maximizing the total surplus received by all members of society.Copyright 2004 South-WesternMARKET EFFICIENCY In addition to market efficiency,a social planner might also care about equity the fairness of the
20、 distribution of well-being among the various buyers and sellers.Figure 7 Consumer and Producer Surplus in the Market EquilibriumCopyright2003 Southwestern/Thomson LearningProducersurplusConsumersurplusPrice0QuantityEquilibriumpriceEquilibriumquantitySupplyDemandACBDECopyright 2004 South-WesternMARK
21、ET EFFICIENCY Three Insights Concerning Market Outcomes Free markets allocate the supply of goods to the buyers who value them most highly,as measured by their willingness to pay.Free markets allocate the demand for goods to the sellers who can produce them at least cost.Free markets produce the qua
22、ntity of goods that maximizes the sum of consumer and producer surplus.Figure 8 The Efficiency of the Equilibrium QuantityCopyright2003 Southwestern/Thomson LearningQuantityPrice0SupplyDemandCosttosellersCosttosellersValuetobuyersValuetobuyersValue to buyers is greaterthan cost to sellers.Value to b
23、uyers is lessthan cost to sellers.EquilibriumquantityCopyright 2004 South-WesternEvaluating the Market Equilibrium Because the equilibrium outcome is an efficient allocation of resources,the social planner can leave the market outcome as he/she finds it.This policy of leaving well enough alone goes
24、by the French expression laissez faire.Copyright 2004 South-WesternEvaluating the Market Equilibrium Market Power If a market system is not perfectly competitive,market power may result.Market power is the ability to influence prices.Market power can cause markets to be inefficient because it keeps
25、price and quantity from the equilibrium of supply and demand.Copyright 2004 South-WesternEvaluating the Market Equilibrium Externalities created when a market outcome affects individuals other than buyers and sellers in that market.cause welfare in a market to depend on more than just the value to t
26、he buyers and cost to the sellers.When buyers and sellers do not take externalities into account when deciding how much to consume and produce,the equilibrium in the market can be inefficient.Copyright 2004 South-WesternSummary Consumer surplus equals buyers willingness to pay for a good minus the a
27、mount they actually pay for it.Consumer surplus measures the benefit buyers get from participating in a market.Consumer surplus can be computed by finding the area below the demand curve and above the price.Copyright 2004 South-WesternSummary Producer surplus equals the amount sellers receive for th
28、eir goods minus their costs of production.Producer surplus measures the benefit sellers get from participating in a market.Producer surplus can be computed by finding the area below the price and above the supply curve.Copyright 2004 South-WesternSummary An allocation of resources that maximizes the
29、 sum of consumer and producer surplus is said to be efficient.Policymakers are often concerned with the efficiency,as well as the equity,of economic outcomes.Copyright 2004 South-WesternSummary The equilibrium of demand and supply maximizes the sum of consumer and producer surplus.This is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently.Markets do not allocate resources efficiently in the presence of market failures.
