Chapter 7 Consumers, Producers, and the Efficiency of Markets PDF

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Chapter 7...

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Chapter 7 Consumers, Producers, and the Efficiency of Markets

Allocation of Resources How much of each good is produced, which producers produce it, and which consumers consume it Welfare Economics Studies how the allocation of resources affects economic well-being of buyers and sellers

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The demand schedule represents the willingness to pay at different prices. o In other words, it shows the max amount that a buyer is willing to pay for that good The demand graph curve graphs the demand schedule At any quantity, the corresponding price along the demand curve represents the willingness to pay of the marginal buyer

Consumer Surplus Amount a buyer is willing to pay for a good, minus the amount the buyer actually pays  Graphically, the sum of consumer surplus of all buyers in a market is the area below the market demand curve and above the price  Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves perceive it. It is a good measure of their economic well-being. 

As the number of buyers increases to include the entire market of a certain good, the demand curve will look more like a smooth curve

Producer Surplus    

For each producer the cost of producing a good includes both explicit and implicit costs (opportunity costs) For a producer their surplus is measured by the difference between the price that they producer receives for a good and the cost that they incur to provide it (production costs and transfer costs) Graphically, as the numbers of sellers increases to include the entire market of a certain good, the supply curve will look more like a smooth curve The height of the supply curve represents seller’s costs. The difference between the sale price and the cost of production is the producer surplus for each seller. The total area below the price and above the supply curve represents the producer surplus of all sellers. Producer surplus is a measure of the economic well-being of sellers.

Total Surplus The total value to buyers of the goods, as measured by their willingness to pay, minus the total costs to sellers to provide that good. Therefore, it is the sum of consumer surplus and producer surplus 

Graphically, total surplus is the area between the supply and the demand curves up to the equilibrium quantity. If a perfectly competitive market is in equilibrium, total surplus is maximized

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An allocation of resources is efficient if it maximizes total surplus. To obtain an efficient allocation of resources low-cost producers will produce the good, while buyers who value the good most highly will buy it

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Perfectly competitive free markets produce the quantity of goods that maximizes consumer and producer surplus

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A social planner (like a policy maker) might want to balance efficiency and equality. Equality is obtained if wealth is distributed uniformly among the members of society. If a policy maker is interested in improving equality, they need to identify a policy that will reach this goal without sacrificing wealth (total surplus)...