Microeconomics 5/10/22

 Consumer Surplus

Welfare Economics

The study of how the allocation of resources affect economic well-being

    - Benefits buyers and sellers receive from market transactions

    - How society can make benefits as large as possible

    - Equilibrium of supply and demand maximizes the total benefits

Willingness to pay

- Max amount a buyer will pay for a good

- How much that buyer values the good

Consumer surplus

- Amount a buyer is willing to pay for a good minus amount the buyer actually pays

- Willingness to pay minus price paid

- Measures benefit buyers receive from participating in a market

- Closely related to the supply curve

- Derived from the costs of the suppliers

- Closely related to demand curve

Demand schedule

- Derived from the willingness to pay of the possible buyers

At any quantity, the price given by the demand curve

- Shows the willingness to pay of the marginal buyer

- Buyer would leave the market first if the price were any higher

Consumer surplus in a market

- Area below the demand curve and above the price

A lower price raises consumer surplus

1. Existing buyers: increase in consumer surplus

    - Buyers who were already buying the good at the higher price are better off because they now pay less

2. New buyers enter the market: increase in consumer surplus

    - Willing to buy the good at the lower price

Producer Surplus

- Value of everything a seller must give up to produce a good

- Measure of willingness to sell

- Amount a seller is paid for a good minus the seller’s cost of providing it

- Price received minus willingness to sell

Supply schedule

- Derived from the costs of the suppliers

At any quantity

- Price given by the supply curve shows the cost of the marginal seller

    - Seller who would leave the market first if the price were any lower

Supply curve

- Reflects sellers’ costs

- Used to measure producer surplus

Producer surplus in a market

- Area below the price and above the supply curve

A higher price raises producer surplus

1. Existing sellers: increase in producer surplus

    - Sellers who were already selling the good at the lower price are better off because they now get more for what they sell

2. New sellers enter the market: increase in producer surplus

    - Willing to produce the good at the higher price

Market Efficiency

The benevolent social planner

- All-knowing, all-powerful, well-intentioned dictator

- Wants to maximize the economic wellbeing of everyone in society

Economic well-being of a society

- Total surplus

- Sum of consumer and producer surplus

Total surplus = Consumer surplus + Producer surplus

- Consumer surplus = Value to buyers – Amount paid by buyers

- Producer surplus = Amount received by sellers – Cost to sellers

- Amount paid by buyers = Amount received by sellers

Total surplus = Value to buyers – Cost to sellers

Efficiency

- Property of a resource allocation

- Maximizing the total surplus received by all members of society

Equality

- Property of distributing economic prosperity uniformly among the members of society

Market outcomes

1. Free markets allocate the supply of goods to the buyers who value them most highly

    - Measured by their willingness to pay

2. Free markets allocate the demand for goods to the sellers who can produce them at the least cost

3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus

Adam Smith’s invisible hand

- Guides everyone in the market to the best outcome

- Economic efficiency