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Premium CH 7 Consumers, Producers, and The Efficiency of Markets
Premium CH 7 Consumers, Producers, and The Efficiency of Markets
N. GREGORY MANKIW
PRINCIPLES OF
ECONOMICS
Eight Edition
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Welfare Economics
• 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
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name
A: Anthony & Flea will buy an
WTP
iPod, Chad & John will not.
Anthony $250
Hence, Qd = 2
Chad 175 when P = $200.
Flea 300
John 125
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 5
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P If P rises to $40,
60 CS = ½ x 10 x $20
1. Fall in CS
= $100.
due to buyers 50
leaving market Two reasons for
40 the fall in CS.
30
2. Fall in CS due to 20
remaining buyers 10
paying higher P D
0 Q
0 5 10 15 20 25 30
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 15
management system for classroom use.
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Producer Surplus
• Cost
– Value of everything a seller must give up to
produce a good
• Measure of willingness to sell: produce and
sell the good/service only if the price > cost
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Producer Surplus
• Derive the supply
P Qs
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
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 19
management system for classroom use.
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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
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 20
management system for classroom use.
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P At each Q, the
height of the S
$40
Chrissy’s curve is the cost
cost of the marginal
$30
seller, the seller
Janet’s who would leave
$20 cost the market if the
price were any
$10 Jack’s cost
lower.
$0 Q
0 1 2 3
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 21
management system for classroom use.
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Producer Surplus
• Producer surplus, PS = P - cost
– Amount a seller is paid for a good minus
the seller’s cost of providing it
– Price received minus willingness to sell
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At Q = 15(thousand), 40
the marginal seller’s 30
cost is $30, 1000s of pairs
and her producer 20 of shoes
surplus is $10. 10
0 Q
0 5 10 15 20 25 30
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 24
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If P falls to $30,
P 1. Fall in PS
PS = ½ x 15 x $15 due to sellers
60
= $112.50 leaving market
50 S
Two reasons for
the fall in PS. 40
30
2. Fall in PS due to 20
remaining sellers 10
getting lower P
0 Q
0 5 10 15 20 25 30
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 26
management system for classroom use.
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Market Efficiency
• Total surplus = CS + PS
– Consumer surplus = Value to buyers –
Amount paid by buyers
• Buyers’ gains from participating in the market
– Producer surplus = Amount received by
sellers – Cost to sellers
• Sellers’ gains from participating in the market
Total surplus = Value to buyers – Cost to sellers
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom 29
use.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 30
management system for classroom use.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 31
management system for classroom use.
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Market equilibrium: P
P = $30
60
Q = 15 (thousand)
Total surplus 50 S
= CS + PS
40 CS
Is the market 30
equilibrium efficient? PS
20
10
D
0 Q
0 5 10 15 20 25 30
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 32
management system for classroom use.
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At Q = 20, cost of
P
producing the
marginal unit is $35 60
value to consumers 50 S
of the marginal unit is 40
only $20
30
Hence, can increase
total surplus by 20
reducing Q. 10
D
This is true at any Q 0 Q
greater than 15. 0 5 10 15 20 25 30
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 35
management system for classroom use.
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At Q = 10, cost of
P
producing the
marginal unit is $25 60
value to consumers 50 S
of the marginal unit is 40
$40
30
Hence, can increase
total surplus by 20
increasing Q. 10
D
This is true at any Q 0 Q
less than 15. 0 5 10 15 20 25 30
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 36
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Adam Smith,
of them… 1723-1790
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….
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Adam Smith,
Nor is it always the worse for the society 1723-1790
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Market Efficiency
• Adam Smith’s invisible hand
– Takes all the information about buyers
and sellers into account
– Guides everyone in the market to the best
outcome
– Economic efficiency
• Free markets
– Best way to organize economic activity
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 39
management system for classroom use.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 40
management system for classroom use.
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© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 42
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Summary
• Consumer surplus: buyers’ willingness to pay for a
good minus the amount they actually pay
– Measures the benefit buyers get from
participating in a market
– Area below the D curve and above P
• Producer surplus: amount sellers receive for their
goods minus their costs of production
– Measures the benefit sellers get from
participating in a market
– Area below P and above the S curve
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 43
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Summary
• An allocation of resources that maximizes total
surplus is said to be efficient
– Policymakers are concerned with the efficiency,
as well as the equality, of economic outcomes.
• Equilibrium of S and D maximizes total surplus
– The invisible hand of the marketplace leads
buyers and sellers to allocate resources
efficiently.
• Markets do not allocate resources efficiently in the
presence of market failures (market power or
externalities)
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
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