Econ1101 Chapter 7 Fall 2024 - Spring 2025
Page 1: Introduction to Economics
Title: Consumers, Producers, and the Efficiency of Markets
Chapter 7
Course: Fall 2024 - Spring 2025, ECON1101: Principles of Microeconomics
Page 2: Consumer Surplus
Welfare Economics: Study of resource allocation and its effect on economic well-being.
Benefits received by buyers and sellers in market transactions.
Goal: Maximize total benefits for society.
Willingness to Pay: Maximum amount a buyer is ready to pay for a good, reflecting the value they attribute to it.
Consumer Surplus: Difference between what a buyer is willing to pay and what they actually pay.
Page 3: Understanding Consumer Surplus
Consumer Surplus: Indicates benefits to buyers from market participation.
Demand Schedule: Shows buyer's willingness to pay for quantities.
Each price on the demand curve reflects the willingness of the marginal buyer to pay, who would exit the market if the price rises.
Market Consumer Surplus: Area beneath the demand curve and above the market price indicates overall consumer benefit.
Page 4: Example of Buyer Willingness to Pay
Buyers and Willingness:
Taylor: $100
Carrie: $80
Rihanna: $70
Gaga: $50
Page 5: Calculating Consumer Surplus
Market Price: $70
Taylor's Surplus: $100 - $70 = $30
Carrie’s Surplus: $80 - $70 = $10
Proceed with similar calculations for others.
Page 6: Impact of Price on Consumer Surplus
Lower prices increase consumer surplus:
Existing buyers benefit from lower prices.
New buyers enter due to attractive pricing enhancing overall surplus.
Economic Well-Being Measure: Consumer surplus serves effectively as an indicator.
Page 7: Graphical Representation of Consumer Surplus
Consumer Surplus Visualization:
At price P1, quantity demanded Q1, area ABC represents consumer surplus.
When price drops to P2, the area expands representing increased consumer surplus.
Illustrates dynamic changes in surplus with price fluctuations.
Page 8: Producer Surplus
Cost: Reflects value of inputs and resources a seller gives up to produce goods.
Producer Surplus: Difference between the amount sellers receive for a good and the actual cost incurred from selling it.
Page 9: Costs of Sellers Example
Sellers and Costs:
Vincent: $900
Claude: $800
Pablo: $600
Andy: $500
Page 10: Producer Surplus and Supply Curve
Producer Surplus Relation: Tied to the supply curve, indicating costs for producers.
Supply Schedule: Displays costs for various quantities.
Marginal seller determination: sellers who exit if prices fall.
Market Producer Surplus: Area above the supply curve but below the market price.
Page 11: Effect of Price on Producer Surplus
Higher prices lead to increased producer surplus:
Existing sellers gain more revenue at elevated prices.
New sellers are incentivized to join the market.
Page 12: Graphical Representation of Producer Surplus
Producer Surplus Visualization:
At price P1, quantity supplied Q1, area ABC indicates producer surplus.
Price increase from P1 to P2 results in increased supply and area expansion.
Page 13: Market Efficiency and Social Planner
Theoretical Benevolent Social Planner aims to maximize broader economic well-being.
Total Surplus: Composite measure of economic utility from consumer and producer surplus.
Page 14: Total Surplus Calculation
Total Surplus = Consumer Surplus + Producer Surplus.
Formulas defining surpluses confirm total value minus total costs gives a comprehensive efficiency perspective.
Page 15: Understanding Market Efficiency
Market Gains from Trade: Efficiency questioned by overall surplus.
Free markets are often optimal for supply allocations based on buyers' willingness to pay and lowest-cost suppliers.
Page 16: Total Surplus Visualization
Total Surplus Area: Region between supply and demand curves at equilibrium quantity represents total surplus.
Page 17: Market Equilibrium Efficiency
At equilibrium, no reallocative adjustments can improve economic well-being without harming others.
Page 18: Pareto Optimality
Pareto Improvement: Achieved if one party benefits without affecting others negatively.
Pareto Efficient Allocation: No further improvements are possible.
Page 19: Economic Efficiency in Markets
Markets optimize consumer and producer surplus through natural equilibria.
Laissez-faire principles suggest minimal interference fosters efficiency.
Page 20: Efficiency of Equilibrium Quantity
Quantities at equilibrium deliver maximum surplus; deviations lead to loss in overall welfare.
Page 21: The Invisible Hand Concept
Adam Smith’s Invisible Hand: Market guides producers and consumers to optimal outcomes efficiently.
Page 22: Efficient Quantity and Social Surplus
Quantifying social surplus at optimal points reveals overall benefits in market mechanics.
Page 23: Pareto Efficient Market Allocation
Confirmation of Pareto efficiency at established market quantities.
Page 24: General Principle of Efficient Quantity
Efficiency equates marginal valuation with marginal cost in production and consumption.
Page 25: The First Welfare Theorem
Preconditions for Pareto efficiency within market structures: perfect competition and absence of externalities.
Page 26: Adam Smith’s Insight
Smith’s observations from Wealth of Nations illustrate the unintended social benefits of self-directed economic behavior aligned by market forces.
Page 27: Efficiency vs. Equity
Markets prioritize efficiency but may not ensure equitable resource distributions.
Page 28: Ethical Considerations in Organ Markets
Discussion prompt focusing on the ethical implications of organ markets through real-case studies.
Page 29: Current Organ Market Policy
Analysis of legal restrictions and potential advantages of regulated organ markets in establishing a balance of supply and demand.
Page 30: Arguments For and Against Organ Markets
Perspectives on the societal implications of allowing organ sales; efficiency faced with fairness critiques.
Page 31: Market Efficiency & Market Failure
Market assumptions necessary for equilibrium performance; deviations from ideal conditions leading to inefficiencies.
Page 32: Impact of Market Dynamics
Externalities and market participant decisions affect non-participants, leading to resource allocation inefficiencies and opportunities for policy intervention.