经济学原理(Ch 7)[1]

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Chapter 7: Consumers, Producers, and the E?ciency of Markets

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

INTRODUCTION

In this chapter, look for the answers to these questions: What is consumer surplus? How is it related to the demand curve? What is producer surplus? How is it related to the supply curve? Do markets produce a desirable allocation of resources? Or could the market outcome be improved upon?

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Welfare Economics
Recall, the allocation of resources refers to:
how much of each good is produced which producers produce it which consumers consume it

Welfare economics studies how the allocation of resources a?ects economic well-being. First, we look at the well-being of consumers. A buyer’s willingness to pay (WTP) for a good is the maximum amount the buyer will pay for that good. WTP measures how much the buyer values the good.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

ACTIVE LEARNING 1
Question
name Anthony Chad Flea John WTP \$250 175 300 125 4 buyers’ WTP for an iPod are listed in the left table. If price of iPod is \$200, who will buy an iPod, and what is quantity demanded?

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

ACTIVE LEARNING 1
Question
name Anthony Chad Flea John WTP \$250 175 300 125 4 buyers’ WTP for an iPod are listed in the left table. If price of iPod is \$200, who will buy an iPod, and what is quantity demanded?

Answer
Anthony & Flea will buy an iPod, Chad & John will not. Hence, Q d = 2 when P = \$200.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

ACTIVE LEARNING 1
WTP and the Demand Curve

Question
Derive the demand schedule. name Anthony Chad Flea John WTP \$250 175 300 125

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

ACTIVE LEARNING 1
WTP and the Demand Curve

Question
Derive the demand schedule. name Anthony Chad Flea John WTP \$250 175 300 125

Answer
P (iPod) \$301 & up 251 - 300 176 - 250 126 - 175 0 - 125 who buys nobody Flea Anthony, Flea Chad, Anthony, Flea John, Chad, Anthony, Flea Qd 0 1 2 3 4

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

ACTIVE LEARNING 1
WTP and the Demand Curve

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

WTP and the Demand Curve
About the Staircase Shape. . .
This D curve looks like a staircase with 4 steps – one per buyer. If there were a huge number of buyers, as in a competitive market, there would be a huge number of very tiny steps, and it would look more like a smooth curve.

At any Q, the height of the D curve is the WTP of the marginal buyer, the buyer who would leave the market if P were any higher.

Consumer Surplus (CS)

De?nition
Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays, i.e., CS = WTP ? P . It measures the bene?t that buyers receive from a good as the buyers themselves perceive it. name Anthony Chad Flea John WTP \$250 175 300 125 Suppose P = \$260. Flea’s CS = \$300 ? 260 = \$40. The others get no CS because they do not buy an iPod at this price. Total CS = \$40.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CS and the Demand Curve

P = \$260 Flea’s CS = \$300 ? 260 = \$40 Total CS = \$40

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CS and the Demand Curve
Instead, suppose P = \$220 Flea’s CS = \$300 ? 220 = \$80 Anthony’s CS = \$250 ? 220 = \$30 Total CS = \$110

Observation
Total CS equals the area under the demand curve above the price, from 0 to Q.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CS with Lots of Buyers & a Smooth D Curve

At Q = 5 (thousand), the marginal buyer is willing to pay \$50 for pair of shoes. Suppose P = \$30. Then his consumer surplus = \$20.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CS with Lots of Buyers & a Smooth D Curve
CS is the area b/w P and the D curve, from 0 to Q. Recall: S = 1/2 × base × height Height (h) = \$60 ? 30 = \$30. Base (d ) = 15 ? 0 = 15. So,CS = 1/2×15×\$30 = \$225.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

How a Higher Price Reduces CS

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Cost and the Supply Curve
Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost). Includes cost of all resources used to produce good, including value of the seller’s time. name Angelo Kitty Hunter cost \$10 35 20

Example (Costs of 3 sellers in the lawn-cutting business)
A seller will only produce and sell the good if the price exceeds his or her cost. Hence, cost is a measure of willingness to sell.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Cost and the Supply Curve

Derive the supply schedule from the cost data name Angelo Kitty Hunter cost \$10 35 20

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Cost and the Supply Curve

Derive the supply schedule from the cost data name Angelo Kitty Hunter cost \$10 35 20 P \$0-9 10-19 20-34 35 & up Qs 0 1 2 3

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Cost and the Supply Curve

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Cost, Producer Surplus, and the Supply Curve
At each Q, the height of the S curve is the cost of the marginal seller, the seller who would leave the market if the price were any lower. Producer surplus (PS): the amount a seller is paid for a good minus the seller’s cost.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Producer Surplus and the S Curve
PS = P ? cost Suppose P = \$25. Angelo’s PS = \$15 Hunter’s PS = \$5 Kitty’s PS = \$0 Total PS = \$20 Total PS equals the area above the supply curve under the price, from 0 to Q.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

PS with Lots of Sellers & a Smooth S Curve

Suppose P = \$40. At Q = 15(thousand), the marginal seller’s cost is \$30, and her producer surplus is \$10.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

PS with Lots of Sellers & a Smooth S Curve

PS is the area b/w P and the S curve, from 0 to Q. The height of this triangle is \$40 ? 15 = \$25. So, PS = 1/2 × d × h = 1/2 × 25 × \$25 = \$312.50

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

How a Lower Price Reduces PS

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

What do CS, PS, and Total Surplus Measure?

CS PS

= (value to buyers) ? (amount paid by buyers) = buyers’ bene?t from participating in the market = (amount received by sellers) ? (cost to sellers) = sellers’ bene?t from participating in the market

Total surplus = CS + PS = total gains from trade in a market

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

The Market’s Allocation of Resources

In a market economy, the allocation of resources is decentralized, determined by the interactions of many self-interested buyers and sellers. Is the market’s allocation of resources desirable? Or would a di?erent allocation of resources make society better o?? To answer this, we use total surplus as a measure of society’s well-being.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Measuring Society’s Well-Being

Total surplus = CS + PS = (value to buyers) ? (amount paid by buyers) +(amount received by sellers) ? (cost to sellers) = (value to buyers) ? (cost to sellers).

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

E?ciency
Total surplus = (value to buyers) ? (cost to sellers)

De?nition
An allocation of resources is e?cient if it maximizes total surplus. E?ciency means: Raising or lowering the quantity of a good would not increase total surplus. The goods are being produced by the producers with lowest cost. The goods are being consumed by the buyers who value them most highly.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

E?ciency vs. Equity

E?ciency means making the pie as big as possible. In contrast, equity refers to whether the pie is divided fairly. What’s “fair” is subjective, harder to evaluate. Hence, we focus on e?ciency as the goal, even though policymakers in the real world usually care about equity, too.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Evaluating the Market Equilibrium

Question
Market eq’m: P = \$30 Q = 15, 000 Total surplus = CS + PS Is the market eq’m e?cient?

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Which Buyers Get to Consume the Good?

Every buyer whose WTP is \$30 will buy. Every buyer whose WTP is < \$30 will not. So, the buyers who value the good most highly are the ones who consume it.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Which Sellers Produce the Good?

Every seller whose cost is \$30 will produce the good. Every seller whose cost is > \$30 will not. Hence, the sellers with the lowest cost produce the good.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Does Eq’m Q Maximize Total Surplus?
At Q = 20, cost of producing the marginal unit is \$35 value to consumers of the marginal unit is only \$20 Hence, can increase total surplus by reducing Q.

Observation
This is true at any Q greater than 15.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Does Eq’m Q Maximize Total Surplus?
At Q = 10, cost of producing the marginal unit is \$25 value to consumers of the marginal unit is \$40 Hence, can increase total surplus by increasing Q.

Observation
This is true at any Q less than 15.

Market E?ciency

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Evaluating the Market Eq’m: Summary

The market eq’m is e?cient:
Eq’m Q maximizes total surplus. Goods produced by the lowest-cost producers. Consumed by buyers who value them the most.

Govt cannot improve on the market outcome. Laissez faire (French for “allow them to do”): the govt should not interfere with the market.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Why Non-Market Allocations Are Usually Bad

Suppose the allocation of resources were instead determined by a central planner. To choose e?cient allocation, planner must know
every seller’s cost every buyer’s WTP

for every good produced in the economy. This is practically impossible. Thus, centrally planned economies are never very e?cient.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Adam Smith and the Invisible Hand
Passages from The Wealth of Nations, 1776 Man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. . . It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. . .

Adam Smith 1723-1790

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

Adam Smith and the Invisible Hand
Passages from The Wealth of Nations, 1776 Every individual. . . neither intends to promote the public interest, nor knows how much he is promoting it. . . He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more e?ectually than when he really intends to promote it.

Adam Smith 1723-1790

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CONCLUSION
This chapter used welfare economics to demonstrate one of the Ten Principles: Markets are usually a good way to organize economic activity. But we assumed markets are perfectly competitive. In the real world, sometimes there are market failures, when unregulated markets fail to allocate resources e?ciently. Causes:
market power – a single buyer or seller can in?uence the market price, e.g. monopoly externalities – side e?ects of transactions, e.g. pollution

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CONCLUSION

When markets fail, public policy may remedy the problem and increase e?ciency. Welfare economics sheds light on market failures and govt policies. Despite the possibility of market failure, the assumptions in this chapter work well in many markets, and the invisible hand remains extremely important.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CHAPTER SUMMARY
The height of the D curve re?ects the value of the good to buyers – their willingness to pay for it. Consumer surplus is the di?erence between what buyers are willing to pay for a good and what they actually pay. On the graph, consumer surplus is the area between P and the D curve The height of the S curve is sellers’ cost of producing the good. Sellers are willing to sell if the price they get is at least as high as their cost. Producer surplus is the di?erence between what sellers receive for a good and their cost of producing it. On the graph, producer surplus is the area between P and the S curve.

ECONOMIC PRINCIPLES Microeconomic Analysis Chapter 7: Consumers, Producers, and the E?ciency of Markets

CHAPTER SUMMARY

To measure of society’s well-being, we use total surplus, the sum of consumer and producer surplus. E?ciency means that total surplus is maximized, that the goods are produced by sellers with lowest cost, and that they are consumed by buyers who most value them. Under perfect competition, the market outcome is e?cient. Altering it would reduce total surplus.

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