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STD Chapter07-Hira PDF
STD Chapter07-Hira PDF
Consumers, Producers,
and the Efficiency of Markets
Chapter 7
PRINCIPLES OF
MICROECONOMICS
2
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 affects economic well-being.
▪ First, we look at the well-being of consumers.
Recall: area of 50
h
a triangle equals 40
½ x base x height
30
Height =
20
$60 – 30 = $30.
10
So, D
CS = ½ x 15 x $30 0 Q
= $225. 0 5 10 15 20 25 30
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 15
How a Higher Price Reduces CS
If P rises to $40,
P
CS = ½ x 10 x $20 1. Fall in CS
60
= $100. due to buyers
50 leaving market
Two reasons for the
fall in CS. 40
30
2. Fall in CS due to 20
remaining buyers 10
paying higher P D
0 Q
0 5 10 15 20 25 30
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 16
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.
▪ Example: Costs of 3 sellers in the lawn-cutting
business.
name cost
A seller will produce and sell
the good/service only if the
Jack $10 price exceeds his or her cost.
Janet 20 Hence, cost is a measure of
Chrissy 35 willingness to sell.
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 17
Cost and the Supply Curve
P Qs
Derive the supply schedule
from the cost data: $0 – 9 0
10 – 19 1
20 – 34 2
name cost
35 & up 3
Jack $10
Janet 20
Chrissy 35
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 18
Cost and the Supply Curve
P
$40 P Qs
$0 – 9 0
$30
10 – 19 1
$20
20 – 34 2
$10 35 & up 3
$0 Q
0 1 2 3
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 19
Cost and the Supply Curve
P
At each Q,
$40 the height of
Chrissy’s
cost the S curve
$30 is the cost of the
Janet’s marginal seller,
$20 cost the seller who
would leave
$10 Jack’s cost the market if
the price were
$0 Q any lower.
0 1 2 3
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 20
Producer Surplus
P PS = P – cost
$40 Producer surplus (PS):
the amount a seller
$30 is paid for a good
minus the seller’s cost
$20
$10
$0 Q
0 1 2 3
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 21
Producer Surplus and the S Curve
P PS = P – cost
$40 Suppose P = $25.
Chrissy’s
cost Jack’s PS = $15
$30
Janet’s Janet’s PS = $5
$20 cost Chrissy’s PS = $0
2. Fall in PS due to 20
remaining sellers 10
getting lower P
0 Q
0 5 10 15 20 25 30
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS 25
CS, PS, and Total Surplus
CS = (value to buyers) – (amount paid by buyers)
= buyers’ gains from participating in the market
Total surplus = CS + PS
= total gains from trade in a market
= (value to buyers) – (cost to sellers)
41
CHAPTER SUMMARY
42
CHAPTER SUMMARY