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.