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Mankiew Chapter 7
Mankiew Chapter 7
7 Efficiency of Markets
PRINCIPLES OF
MICROECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint Slides
by Ron Cronovich
Height of 30
this triangle is 20
$60 30 = $30.
10
So, D
CS = x 15 x $30 0 Q
= $225. 0 5 10 15 20 25 30
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 14
How a Higher Price Reduces CS
If P rises to $40,
P
CS = 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
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 15
ACTIVE LEARNING 1:
demand curve
Consumer surplus 50
P
A. Find marginal $ 45
buyers WTP at 40
Q = 10. 35
B. Find CS for 30
P = $30. 25
Suppose P falls to $20. 20
How much will CS 15
increase due to
10
C. buyers entering
5
the market
0
D. existing buyers
0 5 10 15 20 Q
25
paying lower price
16
ACTIVE LEARNING 1:
demand curve
Answers P
50
$ 45
A. At Q = 10, marginal
buyers WTP is $30. 40
B. CS = x 10 x $10 35
= $50 30
25
P falls to $20.
20
C. CS for the 15
additional buyers
10
= x 10 x $10 = $50
5
D. Increase in CS 0
on initial 10 units
0 5 10 15 20 Q
25
= 10 x $10 = $100
17
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 sellers time.
Example: Costs of 3 sellers in the lawn-cutting
business.
name cost A seller will only produce and
sell the good if the price
Angelo $10 exceeds his or her cost.
Hunter 20
Hence, cost is a measure of
Kitty 35 willingness to sell.
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 18
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
Angelo $10
Hunter 20
Kitty 35
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 19
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
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 20
Cost and the Supply Curve
P At each Q, the
$40 height of the S curve
Kittys
cost
is the cost of the
$30 marginal seller,
the seller who would
Hunters
$20 cost
leave the market if
the price were any
Angelos cost lower.
$10
$0 Q
0 1 2 3
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 21
Producer Surplus
P PS = P cost
$40 Producer surplus (PS):
the amount a seller
$30 is paid for a good
minus the sellers cost.
$20
$10
$0 Q
0 1 2 3
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 22
Producer Surplus and the S Curve
P PS = P cost
$40 Suppose P = $25.
Kittys
cost Angelos PS = $15
$30
Hunters Hunters PS = $5
$20 cost Kittys PS = $0
2. Fall in PS due to 20
remaining sellers 10
getting lower P
0 Q
0 5 10 15 20 25 30
CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS 26
ACTIVE LEARNING 2:
supply curve
Producer Surplus P
50
A. Find marginal 45
sellers cost 40
at Q = 10. 35
B. Find PS for 30
P = $20. 25
Suppose P rises to $30. 20
Find the increase
15
in PS due to
10
C. selling 5
5
additional units
0
D. getting a higher price Q
0 5 10 15 20 25
on the initial 10 units
27
ACTIVE LEARNING 2:
supply curve
Answers P
50
A. At Q = 10, 45
marginal cost = $20 40
B. PS = x 10 x $20 35
= $100 30
P rises to $30. 25
20
C. PS on
15
additional units
= x 5 x $10 = $25 10
5
D. Increase in PS
0
on initial 10 units
0 5 10 15 20 Q
25
= 10 x $10 = $100
28
What Do CS, PS, and Total Surplus Measure?
Total surplus = CS + PS
TS measures the total gains from trade in a market.