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of competitive markets
Peng Shen
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 1 / 21
Motivation
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 2 / 21
Motivation
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 3 / 21
Motivation
Today’s goal:
Evaluate consumers’ and firms’ benefit from participating in the
market
Under what condition can market equilibrium attain the economic
efficiency?
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 4 / 21
Demand Curve as Marginal Benefit Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 5 / 21
Demand Curve as Marginal Benefit Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 5 / 21
Consumer Surplus
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 6 / 21
Consumer Surplus
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 7 / 21
CS in a market with many buyers
If there are infinitely many buyers (and we can record each one’s
reservation price), then we have the market demand curve and CS in the
market as below
Figure 1: CS in the market for chai tea when the price is $2.00
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 8 / 21
Interpretation of Demand Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 9 / 21
Interpretation of Demand Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 9 / 21
Interpretation of Demand Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 9 / 21
Interpretation of Demand Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 9 / 21
Review: area of rectangle and triangle
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 10 / 21
Review: area of rectangle and triangle
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 11 / 21
Supply Curve as Marginal Cost Curve
Lowest Price
Heavenly Tea
willing to accept
1st cup 1.25
2nd cup 1.50
3rd cup 1.75
4th cup 2.00
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 12 / 21
Producer surplus
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 13 / 21
Producer surplus
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 13 / 21
Producer Surplus
Similar to demand and consumer surplus, we can also derive the market
supply and producer surplus from several sellers to infinitely many sellers.
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 14 / 21
Interpretation of Supply Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 15 / 21
Interpretation of Supply Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 15 / 21
Interpretation of Supply Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 15 / 21
Interpretation of Supply Curve
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 15 / 21
Economic Surplus
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 16 / 21
Perfectly Competitive Market Equilibrium
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 17 / 21
Deadweight Loss
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 18 / 21
MB=MC
Recall that we can regard the demand (resp. supply) curve as the marginal
benefit (resp. cost) curve.
Generally, MB is decreasing and MC is increasing.
Equilibrium in a competitive market results in the economically efficient
level of output, at which MB=MC.
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 19 / 21
MB=MC
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 20 / 21
MB=MC
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 20 / 21
MB=MC
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 20 / 21
Equilibrium, Efficiency, and Optimality
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 21 / 21
Equilibrium, Efficiency, and Optimality
Peng Shen Consumer & Producer Surplus, Efficiency September 29, 2021 21 / 21