ECC1000 Lecture Notes - Lecture 4: Economic Surplus, Demand Curve, Deadweight Loss
23 May 2018
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○This would cause price to increase for drugs and lower value for money, also
would increase revenue for drug dealers.
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Topic III: Government Policy in Perfectly Competitive Markets
Week 4 To do: Read Chap 7, 6, and 8, Complete Aplia test by Sunday 23:30
Introduction to Welfare Economics
Allocation
●Market economy allocates resources such that we produce at the output where
demand equals supply (positive economics)
●HOW should society allocate its resources? (normative economics)
●What is the allocation that maximises the economic well-being to society as a whole?
○We have two major economic agents: consumers and producers.
○Later we will consider government (for taxes and subsidies) and we need to
consider government economic well-being as well: benefits (revenue) and
costs
Efficient Allocation
●Resource allocation maximises total surplus received by all members of a society
○Specifically consumers, producers and government
●At a efficient allocation, you cannot make one person better off without making
someone else worse (basically pie is split perfectly evenly and you can’t split it
differently to benefit one person without taking from another)
Inefficient Allocation
●Does not maximise total surplus
●The difference between maximum total surplus (efficient allocation) and actual total
surplus = deadweight loss
●Why might society (government) choose an inefficient allocation?
○A: Efficiency is not the only thing that society cares about. We also care about
equity.
○Raising taxes on people with higher income to benefit those who lower
income.
Consumer and Producer Surplus
Consumer Surplus
●The difference between the maximum a buyer is willing to pay minus the amount
they actually have to pay
○Price = have to pay cost
■Eg: Pizza worth $12 to you, but cost $10 = consumer surplus of $2. If
pizza = $14 then the buyer will not purchase.
Demand Curve and Willingness to Pay
●Demand curve = consumer maximum willingness to pay for Q units of a good is
given by the area under the demand curve up to Q
●Consumer surplus = area under the demand curve (up to Q) but above the price/
difference between willingness to pay and what you have to pay
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Producer Surplus
●Difference between the amount seller actually receives minus the minimum the seller
is willing and able to sell the good for
○The price tell us how much a seller is paid
○Eg: If pizza costs $6 to bake and you sell it for $10 = $4 surplus
■If max = $5 price then not worth selling
●What determines the minimum the seller is willing and able to sell?
○A: cost of production
○In economics, cost = opportunity costs
Supply curve and Willingness to Sell
●Tells minimum willingness to sell Q units of a good for, is given by the area under
the supply curve up to Q
●Producer surplus = area under the price but above the supply curve
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Document Summary
This would cause price to increase for drugs and lower value for money, also would increase revenue for drug dealers. Topic iii: government policy in perfectly competitive markets. Week (cid:547) to do: read chap (cid:550), (cid:549), a(cid:300)d (cid:551), co(cid:299)plete aplia test by )u(cid:300)day (cid:545)(cid:546):(cid:546)(cid:543) Market economy allocates resources such that we produce at the output where demand equals supply (positive economics) How should society allocate its resources? (normative economics) We have two major economic agents: consumers and producers. Later we will consider government (for taxes and subsidies) and we need to consider government economic well-being as well: benefits (revenue) and costs. Resource allocation maximises total surplus received by all members of a society. At a efficient allocation, you cannot make one person better off without making someone else worse (basically pie is split perfectly evenly and you can"t split it differently to benefit one person without taking from another)
