7 Consumers,

Producers, and
Efficiency of
Markets.
Kelompok 10
Andrea Devina Wynona Salsabila Hafiz
Shinta Febriyanti
2006530652 2006576464
2006576565

Bana Atiya Gani Mahesti Layla Nursea

2006466486 2006530684
Welfare Economics
The study of how the allocation
of resources affects economic
well-being
Benefits that buyers and sellers
receive from engaging in market
transactions
- Willingness to pay
➔ Maximum amount that a buyer
will pay for a good
➔ How much that buyer values
the good
WTP and the Demand Curve

Marginal
buyer,

the buyer who

would leave
the market if P
were any
higher
 Consumer surplus
–Measures the benefit buyers receive
from participating in a market
–Consumer surplus is the amount a CS = WTP - Price
buyer is willing to pay minus the amount
the buyer actually pays.

NAME WTP
Price = $260
Anthony $250 Flea’s CS = $40
The others get no consumer
Chad $175 surplus because they don’t buy an
ipod in this price.
Flea $300 Total Consumer Surplus = $40

John $125
Consumer Surplus & Demand Curve
NAME WTP

Anthony $250

Chad $175

Flea $300

John $125
Consumer Surplus & Demand Curve
NAME WTP

Anthony $250

Chad $175

Flea $300

John $125
CS with Lots of Buyers & a Smooth
D Curve
How a higher price reduces CS
Active learning 1
Active learning 1
Producer Surplus

- Amount a seller is paid for a good minus the

seller’s cost of providing it
- Price received minus willingness to sell

Producer Surplus (PS) = P - Cost

Producer Surplus (PS) = P - Cost Name Cost
● Cost Jack $10
- Value of everything a seller must give
up to produce a good Janet $20
- Measure of willingness to sell
Chrissy $35
- Produce and sell good/service only if
price > cost
P (in dollars) Qs
● Derive the supply schedule from the 0-9 0
cost data
10 - 19 1

20 - 34 1

35 + 1
Cost and Supply Curve

P (in dollars) Qs

0-9 0

10 - 19 1

20 - 34 1

35 + 1
Cost and Supply Curve
- At each Quantity, price given
by the supply curve shows
the marginal seller

- Marginal seller
Seller who would leave the
market first if price were any
lower
Producer Surplus and the S Curve
PS = P - cost

Suppose P = $25

Jack’s PS = ?
Janet’s PS = ?
Chrissy PS = ?
Total PS = ?
Producer Surplus and the S Curve
PS = P - cost
Suppose P = $25

Jack’s PS = 25 - 10 = $15
Janet’s PS = 25 - 20 = $5
Chrissy’s PS = 0 (Cost higher than price)

Total PS = 15 + 5 = $20
PS with lots of sellers and a smooth S curve

Marginal Seller’s
cost = $30

PS = Price - cost
= $40 - $30
= $10
PS with lots of sellers and a smooth S curve

PS is the area below the price and

above the supply curve. It shows a
triangle.

base = 25 - 0 = 25
height = 40 - 15 = 25

PS = ½ x base x height
= ½ x 25 x $25
= $312,5
What if the price is higher?
How a lower price reduces PS

PS = ½ x base x height
= ½ x 15 x $15
= $112,5

Fall in PS due to:

1. Sellers leaving market
2. Remaining sellers
getting lower price
Let’s try!
Active Learning 1

A. Q = 10
Cost = $20

A. Total PS =
PS = ½ x base x height
= ½ x 10 x $20
= $100
Active Learning 1

C. PS on additional units
=½xQxP
= ½ x (15-10) x (30-20)
= ½ x 5 x 10 = $25

D. Increase in PS on initial 10
units
=QxP
= 10 x (30 - 20)
= 10 x $10 = $100
MARKET EFFICIENCY
Total surplus = CS + PS
Consumer surplus = Value to buyers – Amount paid by buyers
Producer surplus = Amount received by sellers – Cost to
sellers
Total surplus = Value to buyers – Cost to seller
Market’s Allocation of Resources
Total surplus – measure of society’s well-being
•To consider whether the market’s allocation is efficient
Market’s Allocation of Resources
Efficient allocation of resources maximizes total surplus
1.The goods are consumed by the buyers who value them most
highly
2.The goods are produced by the producers with the lowest costs
3.Raising or lowering the quantity of a good would not increase
total surplus
 Market equilibrium: P = $30
Q = 15 (thousand)
Total surplus = CS + PS

The Efficiency of the Equilibrium Quantity

At quantities less than the equilibrium quantity, such as
Q1, the value to buyers exceeds the cost to sellers.
At quantities greater than the equilibrium quantity, such
as Q2, the cost to sellers exceeds the value to
buyers. Therefore, the market equilibrium maximizes
the sum of producer and consumer 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.

This is true at any Q greater than

15.
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.

This is true at any Q less than

15
Market Efficiency & Market
Failure
Forces of supply and demand
–Allocate resources efficiently
Assumptions about how markets work
1.Markets are perfectly competitive
2.Outcome in a market matters only to the
buyers and sellers in that market
Market failures
–Market power: a single buyer or
seller (small group) control market
prices
•Markets are inefficient

–Externalities: decisions of buyers

and sellers affect people who are
not participants in the market at
all
•Inefficient
equilibrium - from the
standpoint of society as a whole