consumers_producers

3SUPPLYANDDEMANDII:MARKETSANDWELFARE7Consumers,Producers,andtheEfficiencyofMarketsREVISITINGTHEMARKETEQUILIBRIUMDotheequilibriumpriceandquantitymaximizethetotalwelfareofbuyersandsellers?Marketequilibriumreflectsthewaymarketsallocatescarceresources.Whetherthemarketallocationisdesirablecanbeaddressedbywelfareeconomics.WelfareEconomicsWelfareeconomicsisthestudyofhowtheallocationofresourcesaffectseconomicwell-being.Buyersandsellersreceivebenefitsfromtakingpartinthemarket.Theequilibriuminamarketmaximizesthetotalwelfareofbuyersandsellers.WelfareEconomicsEquilibriuminthemarketresultsinmaximumbenefits,andthereforemaximumtotalwelfareforboththeconsumersandtheproducersoftheproduct.WelfareEconomicsConsumersurplusmeasureseconomicwelfarefromthebuyer’sside.Producersurplusmeasureseconomicwelfarefromtheseller’sside.CONSUMERSURPLUSWillingnesstopayisthemaximumamountthatabuyerwillpayforagood.Itmeasureshowmuchthebuyervaluesthegoodorservice.CONSUMERSURPLUSConsumersurplusisthebuyer’swillingnesstopayforagoodminustheamountthebuyeractuallypaysforit.Table1FourPossibleBuyers’WillingnesstoPayCopyright©2004South-WesternCONSUMERSURPLUSThemarketdemandcurvedepictsthevariousquantitiesthatbuyerswouldbewillingandabletopurchaseatdifferentprices.TheDemandScheduleandtheDemandCurveFigure1TheDemandScheduleandtheDemandCurveCopyright©2003Southwestern/ThomsonLearningPriceofAlbum0QuantityofAlbumsDemand1234$100John’swillingnesstopay80Paul’swillingnesstopay70George’swillingnesstopay50Ringo’swillingnesstopayFigure2MeasuringConsumerSurpluswiththeDemandCurveCopyright©2003Southwestern/ThomsonLearning(a)Price=$80PriceofAlbum5070800$100Demand1234QuantityofAlbumsJohn’sconsumersurplus($20)Figure2MeasuringConsumerSurpluswiththeDemandCurveCopyright©2003Southwestern/ThomsonLearning(b)Price=$70PriceofAlbum5070800$100Demand1234Totalconsumersurplus($40)QuantityofAlbumsJohn’sconsumersurplus($30)Paul’sconsumersurplus($10)UsingtheDemandCurvetoMeasureConsumerSurplusTheareabelowthedemandcurveandabovethepricemeasurestheconsumersurplusinthemarket.Figure3HowthePriceAffectsConsumerSurplusCopyright©2003Southwestern/ThomsonLearningConsumersurplusQuantity(a)ConsumerSurplusatPricePPrice0DemandP1Q1BACFigure3HowthePriceAffectsConsumerSurplusCopyright©2003Southwestern/ThomsonLearningInitialconsumersurplusQuantity(b)ConsumerSurplusatPricePPrice0DemandABCDEFP1Q1P2Q2ConsumersurplustonewconsumersAdditionalconsumersurplustoinitialconsumersWhatDoesConsumerSurplusMeasure?Consumersurplus,theamountthatbuyersarewillingtopayforagoodminustheamounttheyactuallypayforit,measuresthebenefitthatbuyersreceivefromagoodasthebuyersthemselvesperceiveit.PRODUCERSURPLUSProducersurplusistheamountasellerispaidforagoodminustheseller’scost.Itmeasuresthebenefittosellersparticipatinginamarket.Table2TheCostsofFourPossibleSellersCopyright©2004South-WesternUsingtheSupplyCurvetoMeasureProducerSurplusJustasconsumersurplusisrelatedtothedemandcurve,producersurplusiscloselyrelatedtothesupplycurve.TheSupplyScheduleandtheSupplyCurveFigure4TheSupplyScheduleandtheSupplyCurveUsingtheSupplyCurvetoMeasureProducerSurplusTheareabelowthepriceandabovethesupplycurvemeasurestheproducersurplusinamarket.Figure5MeasuringProducerSurpluswiththeSupplyCurveCopyright©2003Southwestern/ThomsonLearningQuantityofHousesPaintedPriceofHousePainting500800$90006001234(a)Price=$600SupplyGrandma’sproducersurplus($100)Figure5MeasuringProducerSurpluswiththeSupplyCurveCopyright©2003Southwestern/ThomsonLearningQuantityofHousesPaintedPriceofHousePainting500800$90006001234(b)Price=$800Georgia’sproducersurplus($200)Totalproducersurplus($500)Grandma’sproducersurplus($300)SupplyFigure6HowthePriceAffectsProducerSurplusCopyright©2003Southwestern/ThomsonLearningProducersurplusQuantity(a)ProducerSurplusatPricePPrice0SupplyBACQ1P1Figure6HowthePriceAffectsProducerSurplusCopyright©2003Southwestern/ThomsonLearningQuantity(b)ProducerSurplusatPricePPrice0P1BCSupplyAInitialproducersurplusQ1P2Q2ProducersurplustonewproducersAdditionalproducersurplustoinitialproducersDEFMARKETEFFICIENCYConsumersurplusandproducersurplusmaybeusedtoaddressthefollowingquestion:Istheallocationofresourcesdeterminedbyfreemarketsinanywaydesirable?MARKETEFFICIENCYConsumerSurplus=Valuetobuyers–AmountpaidbybuyersandProducerSurplus=Amountreceivedbysellers–CosttosellersMARKETEFFICIENCYTotalsurplus=Consumersurplus+ProducersurplusorTotalsurplus=Valuetobuyers–CosttosellersMARKETEFFICIENCYEfficiencyisthepropertyofaresourceallocationofmaximizingthetotalsurplusreceivedbyallmembersofsociety.MARKETEFFICIENCYInadditiontomarketefficiency,asocialplannermightalsocareaboutequity–thefairnessofthedistributionofwell-beingamongthevariousbuyersandsellers.Figure7ConsumerandProducerSurplusintheMarketEquilibriumCopyright©2003Southwestern/ThomsonLearningProducersurplusConsumersurplusPrice0QuantityEquilibriumpriceEquilibriumquantitySupplyDemandACBDEMARKETEFFICIENCYThreeInsightsConcerningMarketOutcomesFreemarketsallocatethesupplyofgoodstothebuyerswhovaluethemmosthighly,asmeasuredbytheirwillingnesstopay.Freemarketsallocatethedemandforgoodstothesellerswhocanproducethematleastcost.Freemarketsproducethequantityofgoodsthatmaximizesthesumofconsumerandproducersurplus.Figure8TheEfficiencyoftheEquilibriumQuantityCopyright©2003Southwestern/ThomsonLearningQuantityPrice0SupplyDemandCosttosellersCosttosellersValuetobuyersValuetobuyersValuetobuyersisgreaterthancosttosellers.Valuetobuyersislessthancosttosellers.EquilibriumquantityEvaluatingtheMarketEquilibriumBecausetheequilibriumoutcomeisanefficientallocationofresources,thesocialplannercanleavethemarketoutcomeashe/shefindsit.ThispolicyofleavingwellenoughalonegoesbytheFrenchexpressionlaissezfaire.EvaluatingtheMarketEquilibriumMarketPowerIfamarketsystemisnotperfectlycompetitive,marketpowermayresult.Marketpoweristheabilitytoinfluenceprices.Marketpowercancausemarketstobeinefficientbecauseitkeepspriceandquantityfromtheequilibriumofsupplyanddemand.EvaluatingtheMarketEquilibriumExternalitiescreatedwhenamarketoutcomeaffectsindividualsotherthanbuyersandsellersinthatmarket.causewelfareinamarkettodependonmorethanjustthevaluetothebuyersandcosttothesellers.Whenbuyersandsellersdonottakeexternalitiesintoaccountwhendecidinghowmuchtoconsumeandproduce,theequilibriuminthemarketcanbeinefficient.SummaryConsumersurplusequalsbuyers’willingnesstopayforagoodminustheamounttheyactuallypayforit.Consumersurplusmeasuresthebenefitbuyersgetfromparticipatinginamarket.Consumersurpluscanbecomputedbyfindingtheareabelowthedemandcurveandabovetheprice.SummaryProducersurplusequalstheamountsellersreceivefortheirgoodsminustheircostsofproduction.Producersurplusmeasuresthebenefitsellersgetfromparticipatinginamarket.Producersurpluscanbecomputedbyfindingtheareabelowthepriceandabovethesupplycurve.SummaryAnallocationofresourcesthatmaximizesthesumofconsumerandproducersurplusissaidtobeefficient.Policymakersareoftenconcernedwiththeefficiency,aswellastheequity,ofeconomicoutcomes.SummaryTheequilibriumofdemandandsupplymaximizesthesumofconsumerandproducersurplus.Thisisasiftheinvisiblehandofthemarketplaceleadsbuyersandsellerstoallocateresourcesefficiently.Marketsdonotallocateresourcesefficientlyinthepresenceofmarketfailures.