Consumers, Producers, and the Efficiency of Markets

REVISITING THE MARKET EQUILIBRIUM Do the equilibrium pri e !"# qu!"tit$ m!%imi&e the tot!l 'el(!re o( bu$er) !"# )eller)* M!r+et equilibrium re(le t) the '!$ m!r+et) !llo !te ) !r e re)our e), -hether the m!r+et !llo !tio" i) #e)ir!ble !" be !##re))e# b$ 'el(!re e o"omi ),

Welfare Economics
Welfare economics i) the )tu#$ o( ho' the !llo !tio" o(

re)our e) !((e t) e o"omi 'ell.bei"/, Bu$er) !"# )eller) re ei0e be"e(it) (rom t!+i"/ p!rt i" the m!r+et, The equilibrium i" ! m!r+et m!%imi&e) the tot!l 'el(!re o( bu$er) !"# )eller), Equilibrium i" the m!r+et re)ult) i" m!%imum be"e(it)1 !"# there(ore m!%imum tot!l 'el(!re (or both the o")umer) !"# the pro#u er) o( the pro#u t, 2o")umer )urplu) me!)ure) e o"omi 'el(!re (rom the bu$er3) )i#e,

 5ro#u er )urplu) me!)ure) e o"omi 'el(!re (rom the )eller3) )i#e,

CONSUMER SURPLUS
Willingness to pay i) the m!%imum !mou"t th!t ! bu$er 'ill p!$ (or ! /oo#, It me!)ure) ho' mu h the bu$er 0!lue) the /oo# or )er0i e,

Consumer surplus i) the bu$er3) 'illi"/"e)) to p!$ (or ! /oo# mi"u) the !mou"t the bu$er ! tu!ll$ p!$) (or it, The m!r+et #em!"# ur0e #epi t) the 0!riou) qu!"titie) th!t bu$er) 'oul# be 'illi"/ !"# !ble to pur h!)e !t #i((ere"t pri e), Using the Demand Curve to Measure Consumer Surplus The !re! belo' the #em!"# ur0e !"# !bo0e the pri e me!)ure) the o")umer )urplu) i" the m!r+et, What Does Consumer Surplus Measure Consumer surplus1 the !mou"t th!t bu$er) !re 'illi"/ to p!$ (or ! /oo# mi"u) the !mou"t the$ ! tu!ll$ p!$ (or it1 me!)ure) the be"e(it th!t bu$er) re ei0e (rom ! /oo# as the buyers themselves perceive it,

PRODUCER SURPLUS
Producer surplus i) the !mou"t ! )eller i) p!i# (or ! /oo# mi"u) the )eller3) cost, It me!)ure) the be"e(it to )eller) p!rti ip!ti"/ i" ! m!r+et,

Using the Suppl! Curve to Measure Producer Surplus 7u)t !) o")umer )urplu) i) rel!te# to the #em!"# ur0e1 pro#u er )urplu) i) lo)el$ rel!te# to the )uppl$ ur0e,

"he Suppl! Schedule and the Suppl! Curve

Using the Suppl! Curve to Measure Producer Surplus The !re! belo' the pri e !"# !bo0e the )uppl$ ur0e me!)ure) the pro#u er )urplu) i" ! m!r+et,

M#R$E" E%%&C&ENC'
2o")umer )urplu) !"# pro#u er )urplu) m!$ be u)e# to !##re)) the (ollo'i"/ que)tio"9
I) the !llo !tio" o( re)our e) #etermi"e# b$ (ree m!r+et) i" !"$ '!$ #e)ir!ble*

2S : V!lue to bu$er) ; Amou"t p!i# b$ bu$er) 5S : Amou"t re ei0e# b$ )eller) ; 2o)t to )eller) TS : 2o")umer )urplu) < 5ro#u er )urplu) So TS : V!lue to bu$er) ; 2o)t to )eller)

Efficiency i) the propert$ o( ! re)our e !llo !tio" o( m!%imi&i"/ the tot!l )urplu) re ei0e# b$ !ll member) o( )o iet$, I" !##itio" to m!r+et e((i ie" $1 ! )o i!l pl!""er mi/ht !l)o !re !bout equity ; the (!ir"e)) o( the #i)tributio" o( 'ell.bei"/ !mo"/ the 0!riou) bu$er) !"# )eller),

Three I")i/ht) 2o" er"i"/ M!r+et >ut ome)

?ree m!r+et) !llo !te the )uppl$ o( /oo#) to the bu$er) 'ho 0!lue them mo)t hi/hl$1 !) me!)ure# b$ their 'illi"/"e)) to p!$, ?ree m!r+et) !llo !te the #em!"# (or /oo#) to the )eller) 'ho !" pro#u e them !t le!)t o)t, ?ree m!r+et) pro#u e the qu!"tit$ o( /oo#) th!t m!%imi&e) the )um o( o")umer !"# pro#u er )urplu),

Evaluating the Mar(et E)uili*rium Be !u)e the equilibrium out ome i) !" e((i ie"t !llo !tio" o( re)our e)1 the )o i!l pl!""er !" le!0e the m!r+et out ome !) he@)he (i"#) it, Thi) poli $ o( le!0i"/ 'ell e"ou/h !lo"e /oe) b$ the ?re" h e%pre))io" laissez faire.

M!r+et 5o'er

I( ! m!r+et )$)tem i) "ot per(e tl$ ompetiti0e1 market power m!$ re)ult,

M!r+et po'er i) the !bilit$ to i"(lue" e pri e),

M!r+et po'er !" !u)e m!r+et) to be i"e((i ie"t be !u)e it +eep) pri e !"# qu!"tit$ (rom the equilibrium o( )uppl$ !"# #em!"#,

Evaluating the Mar(et E)uili*rium E%ter"!litie)

re!te# 'he" ! m!r+et out ome !((e t) i"#i0i#u!l) other th!" bu$er) !"# )eller) i" th!t m!r+et, !u)e 'el(!re i" ! m!r+et to #epe"# o" more th!" Bu)t the 0!lue to the bu$er) !"# o)t to the )eller),

-he" bu$er) !"# )eller) #o "ot t!+e e%ter"!litie) i"to ! ou"t 'he" #e i#i"/ ho' mu h to o")ume !"# pro#u e1 the equilibrium i" the m!r+et !" be i"e((i ie"t,

Summar!
2o")umer )urplu) equ!l) bu$er)3 'illi"/"e)) to p!$ (or ! /oo# mi"u) the !mou"t the$ ! tu!ll$ p!$ (or it, 2o")umer )urplu) me!)ure) the be"e(it bu$er) /et (rom p!rti ip!ti"/ i" ! m!r+et, 2o")umer )urplu) !" be ompute# b$ (i"#i"/ the !re! belo' the #em!"# ur0e !"# !bo0e the pri e, 5ro#u er )urplu) equ!l) the !mou"t )eller) re ei0e (or their /oo#) mi"u) their o)t) o( pro#u tio", 5ro#u er )urplu) me!)ure) the be"e(it )eller) /et (rom p!rti ip!ti"/ i" ! m!r+et, 5ro#u er )urplu) !" be ompute# b$ (i"#i"/ the !re! belo' the pri e !"# !bo0e the )uppl$ ur0e, A" !llo !tio" o( re)our e) th!t m!%imi&e) the )um o( o")umer !"# pro#u er )urplu) i) )!i# to be e((i ie"t, 5oli $m!+er) !re o(te" o" er"e# 'ith the e((i ie" $1 !) 'ell !) the equit$1 o( e o"omi out ome), The equilibrium o( #em!"# !"# )uppl$ m!%imi&e) the )um o( o")umer !"# pro#u er )urplu), Thi) i) !) i( the i"0i)ible h!"# o( the m!r+etpl! e le!#) bu$er) !"# )eller) to !llo !te re)our e) e((i ie"tl$, M!r+et) #o "ot !llo !te re)our e) e((i ie"tl$ i" the pre)e" e o( m!r+et (!ilure),