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Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Welfare Economics
Welfare economics is the study of how
the allocation of resources affects
economic well-being.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Welfare Economics
Equilibrium in the market results in
maximum benefits, and therefore
maximum total welfare for both the
consumers and the producers of the
product.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Welfare Economics
Consumer
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Consumer Surplus
Willingness
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Consumer Surplus
Consumer surplus is the amount
a buyer is willing to pay for a
good minus the amount the buyer
actually pays for it.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Willingness to Pay
John
$100
Paul
80
George
70
Ringo
50
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Consumer Surplus
The market demand curve depicts
the various quantities that buyers
would be willing and able to
purchase at different prices.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Buyer
Quantity
Demanded
None
$80 to $100
John
$70 to $80
John, Paul
$50 to $70
$50 or less
Ringo
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
$100
80
70
50
Demand
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Albums
Price = $80
$100
80
70
50
Demand
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Albums
Price = $70
$100
80
70
50
Demand
3
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Albums
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
P1
P2
Initial
consume
r
surplus
B
Additiona
l
consumer
surplus
to initial
consumer
Q1
s
Consumer
surplus to
new
consumers
Demand
Q2
Quantity
Producer Surplus
Producer
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Cost
Mary
$900
Frida
800
Georgia
600
Grandma
500
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Sellers
Quantity
Supplied
$900 or more
$800 to $900
$600 to $800
Georgia, Grandma
$500 to $600
Grandma
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Supply
Marys cost
Fridas cost
$900
800
Georgias cost
Grandmas cost
600
500
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Houses Painted
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Price of
House
Painting
Supply
$900
800
600
500
Grandmas producer
surplus ($100)
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Houses Painted
Price of
House
Painting
$900
Supply
Total
producer
surplus ($500)
800
Georgias producer
surplus ($200)
600
500
Grandmas producer
surplus ($300)
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Houses Painted
Initial
Produce
r
surplus
Supply
Producer surplus
to new producers
A
0
Q1
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Q2
Quantity
Market Efficiency
Consumer surplus and producer
surplus may be used to address the
following question:
Is the allocation of resources
determined by free markets in any way
desirable?
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Value
_
to
buyers
and
Producer
Amount
=
Surplus
received by
sellers
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Amount
paid by
buyers
_ Cost
to
sellers
Consume
r Surplus
Producer
Surplus
or
Total
Surplus
Value
to
buyers
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
_ Cost
to
sellers
Market Efficiency
Market efficiency is achieved when
the allocation of resources
maximizes total surplus.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Market Efficiency
In addition to market efficiency, a
social planner might also care about
equity the fairness of the
distribution of well-being among the
various buyers and sellers.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Equilibrium
price
Supply
Demand
C
0
Equilibrium
quantity
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity
Equilibrium
price
Supply
Consumer
surplus
E
Producer
surplus
Demand
C
0
Equilibrium
quantity
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Cost
to
seller
s
Cost
to
seller
s Equilibrium
quantity
Value
to
buyer
s
Demand
Quantity
Value to buyers is
Value to buyers is less
greater than cost to
than cost to sellers.
Harcourt, Inc. items and derived
items copyright 2001 by Harcourt, Inc.
sellers.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Market Power
If a market system is not perfectly
competitive, market power may result.
Market power is the ability to influence
prices.
Market power can cause markets to be
inefficient because it keeps price and
quantity from the equilibrium of supply
and demand.
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Externalities
Externalities are created when a market
outcome affects individuals other than
buyers and sellers in that market.
Externalities
Summary
Consumer
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Summary
Producer
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Summary
The
Summary
An
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Graphical
Review
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
$100
80
70
50
Demand
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Albums
Price = $80
$100
80
70
50
Demand
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Albums
Price = $70
$100
80
70
50
Demand
3
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Albums
P1
P2
Initial
consume
r
surplus
B
Additiona
l
consumer
surplus
to initial
consumer
Q1
s
Consumer
surplus to
new
consumers
Demand
Q2
Quantity
Supply
Marys cost
Fridas cost
$900
800
Georgias cost
Grandmas cost
600
500
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Houses Painted
Price of
House
Painting
Supply
$900
800
600
500
Grandmas producer
surplus ($100)
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Houses Painted
Price of
House
Painting
$900
Supply
Total
producer
surplus ($500)
800
Georgias producer
surplus ($200)
600
500
Grandmas producer
surplus ($300)
0
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity of
Houses Painted
Initial
Produce
r
surplus
Supply
Producer surplus
to new producers
A
0
Q1
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Q2
Quantity
Equilibrium
price
Supply
Demand
C
0
Equilibrium
quantity
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity
Equilibrium
price
Supply
Consumer
surplus
E
Producer
surplus
Demand
C
0
Equilibrium
quantity
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Quantity
Cost
to
seller
s
Cost
to
seller
s Equilibrium
quantity
Value
to
buyer
s
Demand
Quantity
Value to buyers is
Value to buyers is less
greater than cost to
than cost to sellers.
Harcourt, Inc. items and derived
items copyright 2001 by Harcourt, Inc.
sellers.