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Chapter 7 (Consumers, Producers, and The Efficiency of The Markets)

The document defines key concepts in welfare economics such as consumer surplus, producer surplus, total surplus, and efficient allocation. It explains that an efficient allocation maximizes total surplus, which is the sum of consumer surplus and producer surplus. A benevolent social planner aims to maximize total surplus and economic well-being for all in a society. Free markets are generally efficient because they allocate supply to buyers with highest willingness to pay and demand to sellers with lowest costs, maximizing total surplus.

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45 views24 pages

Chapter 7 (Consumers, Producers, and The Efficiency of The Markets)

The document defines key concepts in welfare economics such as consumer surplus, producer surplus, total surplus, and efficient allocation. It explains that an efficient allocation maximizes total surplus, which is the sum of consumer surplus and producer surplus. A benevolent social planner aims to maximize total surplus and economic well-being for all in a society. Free markets are generally efficient because they allocate supply to buyers with highest willingness to pay and demand to sellers with lowest costs, maximizing total surplus.

Uploaded by

Julz Julia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 7

Consumers, Producers,
and the Efficiency of
Markets
RMBPanti, ADMU
Definition

Welfare Economics

Study of how the allocation of resources affects economic


well-being
A. Consumer Surplus
Definition

Willingness to Pay

The maximum amount that the buyer will pay for a good.
Example
Example
Definition

Consumer Surplus

Consumer surplus is the area above the price and below


the demand curve.
Consumer Surplus
Consumer Surplus
Example

Consider a linear demand curve Q = 20 – 2p.

1. What is the consumer surplus price is p = 2


2. What is the change in consumer surplus when price
increases to p=3?
B. Producer Surplus
Definition

Cost

• the value of everything a seller must give up to produce a


good
• measure of willingness to sell
Example
Example
Definition

Producer Surplus

Producer surplus is the area below the price and above the
supply curve.
Producer Surplus
Producer Surplus
Example

Consider the supply function y = 4p – 20

1. What is the producer surplus when price is p = 7


2. What is the change in producer surplus when price
increases to p=9?
C. Market Efficiency
Benevolent Social Planner

• The benevolent social planner is an all-knowing, all-


powerful, well-intentioned dictator.
• The planner wants to maximize the economic well-being
of everyone in the society.
Definition

Total surplus

• Sum of producer and consumer surplus


• Measure of economic well-being
• Value to buyers – cost to sellers
Definition

Efficient Allocation

An allocation is efficient if it maximizes consumer surplus


Evaluating Market Equilibrium
Evaluating Market Equilibrium

1. Free markets allocate the supply of goods to the


buyers who value them most highly, as measured by
their willingness to pay
2. Free markets allocate the demand of goods to the
sellers who can produce them at the lowest price
3. Free markets produce the quantity of goods that
maximizes the sum of consumer and producer surplus.

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