ch04

Overview of Economics Concepts

• This chapter covers key concepts related to consumer and producer surplus, total surplus, and market efficiency.

What You Will Learn in This Chapter

• Definitions and understanding of:

  • Consumer Surplus

  • Producer Surplus

  • Total Surplus and its significance in illustrating market gains from trade

  • The role of Property Rights and Economic Signals in effective market functioning

  • Reasons for market failures and inefficiencies

Measuring Market Efficiency

• Analyzing consumer and producer surplus aids in understanding:

  • Benefits received by producers and consumers from market transactions

  • Impact of price changes on consumer and producer welfare

Consumer Surplus: Part 1

• Willingness to Pay: The maximum price a consumer is willing to pay for a good.

• Individual Consumer Surplus: The difference between what a buyer is willing to pay and the price paid.

• Total Consumer Surplus: Aggregate of individual consumer surpluses across all buyers in the market.

• Economists often interchange consumer surplus with both individual and total consumer surplus.

Demand Curve for Used Textbooks

• Visual representation needed (Figure 4-1).

Consumer Surplus: Part 2

• Total Consumer Surplus Calculation: The area below the demand curve and above the market price, represented by the total of individual consumer surpluses from each buyer (Example: Aisha, Ben, and Chloe generate a total surplus of $49).

Practice Question

• Example of George's Shirt Purchase:

  • Willing to pay:

    • $35 for the first shirt

    • $25 for the second shirt

    • $15 for the third shirt

  • Current price is $28.

  • Efficient Purchase: Number of shirts to buy leads to a consumer surplus of $7 (35-28).

Consumer Surplus: Part 3

• Representation of consumer surplus as the area beneath the demand curve but above the price level (Figure 4-3).

Effect of Price Changes on Consumer Surplus

• When prices drop, consumer surplus increases.

  • Price Drop Gain Breakdown:

    • Dark Blue Rectangle: Gain for buyers who would have purchased at the original price ($30).

    • Light Blue Rectangle: Gain for new buyers at the reduced price ($20).

Gains in Consumer Surplus Distribution

• Examination of distribution (Figure 4-5).

Discussion Prompt

• Kidney Allocation Debate: Discuss the most ethical way to allocate donated kidneys:

  • Option 1: Market-based approach

  • Option 2: First-come-first-served model

  • Option 3: Based on survival benefit matching.

Supply Curve for Used Textbooks

• Visual representation needed (Figure 4-6).

Producer Surplus: Part 1

• Definition: Difference between market price and the minimum price at which producers are willing to sell.

• Individual Producer Surplus: Net gain for each seller, calculated as the price received minus the seller's costs (monetary and opportunity costs).

• Total Producer Surplus: Aggregate of all individual producer surpluses in the market.

Producer Surplus: Part 2

• Example of producer surplus when a used textbook’s price is $30 (Table 4-2):

  • Sellers (Andrew, Betty, Carlos, etc.) calculate individual surpluses.

  • Total Producer Surplus: $45.

Producer Surplus: Part 3

• Visualization of producer surplus shifts (Figure 4-7).

Producer Surplus: Part 4

• Further illustration of concepts (Figure 4-8).

Increase in Producer Surplus with Price Rise

• Analyzing effects of price increases on producer surplus (Figure 4-9).

Total Surplus: Intersection of Concepts

• Definition: Total surplus combines both consumer and producer surplus (Figure 4-11).