23115 Lecture Notes - Lecture 4: Deadweight Loss, Market Power, Resale Price Maintenance
Lecture 4 - Efficiency of Markets, the Cost of Taxation
- Consumers, Producers, and the Efficiency of Markets (CHAPTER 7)
▪ Welfare economics is the stud of ho the alloatio of esoues affets eooi ell‐ eig.
CONSUMER SURPLUS
▪ Willingness to pay is the maximum amount that a buyer will pay for a good.
▪ Consumer surplus is a ue’s illigess to pa ius the aout the ue atuall pas.
It is a easue of the ue’s peeied eefit fo puhasig the good, o euialetly, A
measure of the benefit that a buyer derives from participating in the market of the good.
▪ We have many consumers in the market, each with their own WTP.
▪ If you know the WTP of each consumer in the market AND the market price, then you can
calculate the CS for each individual consumer. By summing these up, you find the total CS. ▪ Given
the ues’ WTP, e a deie the aket demand schedule.
At any given quantity, the price given by the D curve shows the WTP of the marginal buyer. Marginal
buyer is the buyer who would leave the market first if the price were any higher.
Equivalently, at any given quantity the height of the D curve (i.e. the price) shows the value of the
last unit of the good bough
• The lesson from this example applies to all supply curves: The area below the price and
above the supply curve measures the producer surplus in a market. The logic is
staightfoad: The height of the suppl ue easues selles’ osts, ad the diffeee
between the price and the cost of podutio is eah selle’s podue suplus. Thus, the
total area is the sum of the producer surplus of all sellers.
• So how does a higher price raise producer surplus?
•
• Suppose the market price is initially P – PS is area ABC
1
How does PS change if market price increases to P ? 2
PS is now area ADF.
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Document Summary
Lecture 4 - efficiency of markets, the cost of taxation. Consumers, producers, and the efficiency of markets (chapter 7: welfare economics is the stud(cid:455) of ho(cid:449) the allo(cid:272)atio(cid:374) of (cid:396)esou(cid:396)(cid:272)es affe(cid:272)ts e(cid:272)o(cid:374)o(cid:373)i(cid:272) (cid:449)ell (cid:271)ei(cid:374)g. Consumer surplus: willingness to pay is the maximum amount that a buyer will pay for a good, consumer surplus is a (cid:271)u(cid:455)e(cid:396)"s (cid:449)illi(cid:374)g(cid:374)ess to pa(cid:455) (cid:373)i(cid:374)us the a(cid:373)ou(cid:374)t the (cid:271)u(cid:455)e(cid:396) a(cid:272)tuall(cid:455) pa(cid:455)s. By summing these up, you find the total cs. Given the (cid:271)u(cid:455)e(cid:396)s" wtp, (cid:449)e (cid:272)a(cid:374) de(cid:396)i(cid:448)e the (cid:373)a(cid:396)ket demand schedule. At any given quantity, the price given by the d curve shows the wtp of the marginal buyer. Marginal buyer is the buyer who would leave the market first if the price were any higher. The logic is st(cid:396)aightfo(cid:396)(cid:449)a(cid:396)d: the height of the suppl(cid:455) (cid:272)u(cid:396)(cid:448)e (cid:373)easu(cid:396)es selle(cid:396)s" (cid:272)osts, a(cid:374)d the diffe(cid:396)e(cid:374)(cid:272)e between the price and the cost of p(cid:396)odu(cid:272)tio(cid:374) is ea(cid:272)h selle(cid:396)"s p(cid:396)odu(cid:272)e(cid:396) su(cid:396)plus.
