ECON 1 Lecture Notes - Lecture 6: Economic Surplus, Demand Curve
#6 Thursday 2/1 (Ch.7 Efficiency of Markets and Welfare)
Today
Free markets are generally the most efficient way to organize an economy:
● The goods are consumed by the buyers who value them most highly.
● The goods are produced by the producers with the lowest costs.
● There are times when the market fails and the government is needed to sep in
Willingness to Pay
●Willingness to pay measures how much a buyer values a good = maximum amount a buyer will pay
for it
● In a free market, the consumers with the highest WTP obtain the good
● Why shouldn’t everyone have access to the good? Because goods are scarce and there are trade-offs
so the question is how do you allocate limited resources. When you let the economy work, the
consumers
Example: WTP for iPhone
WTP
($)
Anthony
250
Chad
175
Flea
300
John
125
Clicker Question
Q: If price is $200, what is market Demand for iPhones?
A: When P
= $200, only Anthony & Flea buy it → Qd = 2
WTP and the Demand Curve
Consumer Surplus
Consumer surplus measures the buyers’ gains from participating in the market
It is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP - P
Intuition
● Flea’s WTP = 300
● If P
= $260 → Flea’s CS = #300 - 260 = $40
● This measures how much Flea benefits from buying her iPhone
How to Visualize CS
If P
= 260
Flea’s CS = $300 - $260 = $40
If P
= $220
Flea’s CS = $300 - $220 = $80
Anthony’s CS = $250 - $220 = $30
Total CS = $110
Document Summary
#6 thursday 2/1 (ch. 7 efficiency of markets and welfare) Free markets are generally the most efficient way to organize an economy: The goods are consumed by the buyers who value them most highly . The goods are produced by the producers with the lowest costs . There are times when the market fails and the government is needed to sep in. Willingness to pay measures how much a buyer values a good = maximum amount a buyer will pay. In a free market, the consumers with the highest wtp obtain the good. Because goods are scarce and there are trade-offs so the question is how do you allocate limited resources. When you let the economy work, the consumers. A: when p = , only anthony & flea buy it q d = 2. Consumer surplus measures the buyers" gains from participating in the market.
