Sabina Turakulova.Sum.Econ PDF

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principles of economics...

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Chapter 7 Consumers, Producers, and the Efficiency of Markets Welfare economics is the study of how the allocation of resources and goods affects social welfare. This relates directly to the study of economic efficiency and income distribution, as well as how these two factors affect the overall well-being of people in the economy. 

Consumer Surplus

Willingness to Pay (WTP) is about how high buyers value the good or service. The higher value the higher price buyers are ready to give. For example, the number of cars which looks like ‘30. Z777ZZ’ was sold in auction for $60.000. Initial price was $11.000. The man who bought it valued the good higher than other participants of the auction. Consumer surplus – is the amount of money the buyer is ready to give minus the amount that he really pays. Let’s take as example the Bugatti Chiron (Hermes Edition). This car has been being the fastest one in the world. So, those, who love racing will value this car more than others. So, this company hold an auction to sell one of such cars. Let’s imagine that there are 3 buyers: Nikki, Amy, Sasha. Nikki’s WTP is $3 million, Amy’s $4M, and Sasha’s $6M. The price is $4M. So, consumer surplus of Sasha is $6M (her willingness to pay) minus $4M (the price of car in market) and it equals to $2 million. When it comes to Amy at a price equal to her willingness to pay, the buyer would be indifferent about buying the good: If the price is exactly the same as the value she places on the album, she would be equally happy buying it or keeping her money. Nikki’s WTP is $3M which means that he will leave market. However, if the price falls down to $2M, the amount of total consumer surplus raises. ($6M-2M) +($4M-2M) +($3M-2M) =$7M. At the initial price total consumer surplus was $2M, but when the price dropped, TCS was increased for $5M. The area below the demand curve and above the price measures the consumer surplus in a market. consumer surplus is a good measure of economic well-being if policymakers want to satisfy the preferences of buyers. 

Producer Surplus

Cost can be defined as a monetary valuation of efforts, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in the production of a good or service. Willingness to Sell (WTS) is the amount of money for which person or organization is ready to do the work. For instance, Ms. Dreamer wants to book hotel in Antalya. And to find the appropriate price she searches different hotels in Booking.com. There are 3 hotels: Hayat, Hilton and Blue Island. One night in Hayat costs $100, in Hilton- $300, and in Blue Island- $500. So, her budget is $400. Blue Island leaves the market because it’s willingness to sell is higher than the WTP of buyer. Overall, the amount offered by Hayat and Hilton covers their costs and appropriate for customer. By using this example, we can define the term producer surplus. In other words, producer surplus is the difference between how much a person would be willing to accept for given quantity of a good versus how much they can receive by selling the good at the market price. The difference or surplus amount is the benefit the producer receives for selling the good in the market. Hayat is selling its service for one night for $100, however customer is ready to give more, exactly $400. So, Hayat’s producer surplus is $300 and Hilton’s is $100. And the total producer surplus equals to $400. However, if the WTP of customer raises to $600, we have new participants like Blue Island and its producer surplus is $100. But we add $200 to the producer surplus of the rest participants and new total producer surplus equals to $500.

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Market Efficiency

How to measure the economic well-being of a society? To answer this question, we have to look through total surplus. Consumer surplus is the benefit that buyers receive from participating in a market, and producer surplus is the benefit that sellers receive. Total surplus is thus a natural measure of society’s economic well-being. Consumer Surplus = Value to buyers – Amount paid by buyers Producer Surplus = Amount received by sellers – Cost to sellers Total surplus = (Value to buyers – Amount paid by buyers) + (Amount received by sellers – Cost to sellers) Total surplus = Value to buyers – Cost to sellers Efficiency is about maximizing total surplus. In other words, making the pie as big as possible Equality is about distributing resources uniformly among members of society....