Chapter 5: Efficiency

willingness to pay and demand curve

the max price a buyer is willing to pay for a good.

People with a higher WTP are willing to pay more, so they appear higher on the demand curve

if market price is lower than buyers WTP, they buy the product

Willingness to sell and supply curve

1. the min price a seller is willing to accept for.a good

2. sellers with lower WTS appear lower on the supply curve

3. if market price is higher than a sellers WTS, they sell the product

Measuring surplus

the difference between the price at which a buyer or seller would be willing to trade and the actual market price

consumer surplus

the difference between the max price a consumer is willing to pay and the actual market price

Formula : willingness to pay - market price

producer surplus

the difference between the actual market price and the minimum a price a seller is willing to accept

PS: market price - willingness to sell

consumer surplus graphically

the area below the demand curve and above the market price

producer surplus graphically

the area above the supply curve and below the market price

Total surplus

consumer surplus + producer surplus, the total benefit that buyers and sellers recieve from the trade

total surplus is maximized when the market is at equilibrium

total surplus graphically

the area between the demand and supply curve up to equilibirum point

market equilibirum = maximum efficiency

the market equilibrium is where quantity supplied = quantity demanded.

deadweight loss - Inefficiency in the market

the loss of total surplus when the market is not at equilibirum

happens when prices are too high, prices are too low, government intervention(taxes, price controls,etc)

deadweight loss formula

DWL = ½ X QUANTITY LOST X PRICE DIFFERENCE

missing markets

a missing market occurs when a good isn’t traded, even though buyers and sellers exist

Cuase of missing markets

gov restrictions, taxes and subsidies, lack of info, lack of tech