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Greebes For Sale!. Each of you has been given either a card or a packet of money.

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Presentation on theme: "Greebes For Sale!. Each of you has been given either a card or a packet of money."— Presentation transcript:

1 Greebes For Sale!

2 Each of you has been given either a card or a packet of money

3 Greebes For Sale! Those of you that have a card…congrats! You are in the Greebe business Your card tells you how many Greebes you have for sale and what you are willing to sell them for in the market You are not willing to go any lower on price than what is on your card!

4 Greebes For Sale! Those of you that have money…congrats! You are in the market for a new greebe. All the money you have in your possession right now is strictly for buying a greebe. You are willing to spend that much on one. You are not able to spend any more than what you have right now…no trading money!

5 Greebes for Sale! Our first step…find our equilibrium price/quantity!

6 Greebes for Sale! PriceQuantity of Greebes Supplied $1 $2 $3 $4 $5

7 Greebes for Sale! PriceQuantity of Greebes Supplied $11 $2 $3 $4 $5

8 Greebes for Sale! PriceQuantity of Greebes Supplied $11 $22 $3 $4 $5

9 Greebes for Sale! PriceQuantity of Greebes Supplied $11 $22 $33 $4 $5

10 Greebes for Sale! PriceQuantity of Greebes Supplied $11 $22 $33 $44 $5

11 Greebes for Sale! PriceQuantity of Greebes Supplied $11 $22 $33 $44 $55

12 Greebes for Sale! Assuming our supply curve is a straight line…lets draw it on the board.

13 Greebes for Sale! PriceQuantity of Greebes Supplied $11 $22 $33 $44 $55

14 Greebes for Sale! Now lets look at demand!

15 Greebes for Sale! PriceQuantity of Greebes Demand $10 $9 $8 $7 $6 $5

16 Greebes for Sale! PriceQuantity of Greebes Demand $100 $9 $8 $7 $6 $5

17 Greebes for Sale! PriceQuantity of Greebes Demand $100 $91 $8 $7 $6 $5

18 Greebes for Sale! PriceQuantity of Greebes Demand $100 $91 $82 $7 $6 $5

19 Greebes for Sale! PriceQuantity of Greebes Demand $100 $91 $82 $73 $6 $5

20 Greebes for Sale! PriceQuantity of Greebes Demand $100 $91 $82 $73 $64 $5

21 Greebes for Sale! PriceQuantity of Greebes Demand $100 $91 $82 $73 $64 $55

22 Greebes for Sale! Assuming our demand curve is a straight line…lets draw it on the board as well!

23 Greebes for Sale! Now lets look at our equilibrium. We know the quantity supplied needs to equal the quantity demanded.

24 Greebes for Sale! Quantity Demanded Quantity Supplied $555

25 Greebes for Sale! Our equilibrium price is $5! This is where there are 5 greebes supplied and 5 greebes demanded.

26 Greebes for Sale! Now that we have that…lets do some shopping.

27 Greebes for Sale! Lets look at the buying side first. Im going to call each of you up and you are going to put your $5 for your greebe in this pile. Your extra money goes in this pile.

28 Greebes for Sale! What does this pile represent? Its the extra money that consumers have left over that they were willing to spend on greebes but did not have to because the price was lower than what they were willing to pay.

29 Greebes for Sale! We call this consumer surplus!

30 Greebes for Sale! How could we represent this amount on our graph?

31 Greebes for Sale! Now lets look at our producers! You will come up and take your $5 for your greebe. You may take back your original price on your card to your seat. You must put the extra in this pile here.

32 Greebes for Sale! What does this pile represent? This is the extra money that went to the producers because they were willing to sell a greebe for less than the market price.

33 Greebes for Sale! We call this producer surplus!

34 Greebes for Sale! How could we represent this on our graph?

35 Assignment For Tonight Read pages 138 – 147 in your book. Be prepared to answer questions over the material tomorrow!

36 What is an example of a market where we would not care about consumer surplus or using it to analyze desirable outcomes?

37 Welfare Economics Up until now, weve looked at what is Now looking at bit more at what should be…

38 Consumer Surplus Use value to assess willingness to pay of a buyer What are you willing to spend on a good

39 What would you pay for?

40 Consumer Surplus If the price is: Above what a person is willing to pay he/she will not buy it At what a person is willing to pay he/she is indifferent Just as happy buying the item as keeping the money Below what a person is willing to pay he/she will happily buy it

41 When the price is below what a person is willing to pay he/she benefits in two ways: 1.The benefit of having the item 2.The benefit of having extra money left over from what you were prepared to pay for it This extra money is consumer surplus!

42 Consumer Surplus Consumer surplus is closely related to the demand curve Each point on the curve is derived from the willingness to pay of buyers.

43 Consumer Surplus At any quantity the price given by the curve shows the willingness to pay of the marginal buyer This is the buyer that would leave the market first if the price were any higher!

44 Consumer Surplus Because the demand curve shows willingness to pay, we use it to show consumer surplus!

45 Consumer Surplus When we have equilibrium Consumer Surplus = area below demand curve and above price

46 Consumer Surplus How can we increase consumer surplus? LOWER PRICES!

47 Increasing Consumer Surplus

48 Consumer Surplus So what is the point?!

49 Consumer Surplus We use consumer surplus to analyze the desirability of market outcomes.

50 Consumer Surplus If you want to represent the preferences of consumers: consumer surplus is a good measure of economic well-being.

51 Consumer Surplus Sometimes might not care about consumer surplus.

52 Consumer Surplus Drugs! A junkie might be quite thrilled that blue meth is priced less than what they are willing to pay for it…however, measuring this is not a good indicator of economic well being!

53 Producer Surplus Need a new definition for cost: Looking at actual monetary costs and opportunity cost of lost opportunities.

54 Producer Surplus Here cost is a measure of willingness to sell. This is the lowest price you would take for your good/service.

55 As a supplier you would be: -Happy to sell your good/service at a price higher than cost -Refuse to sell your good/service at a price lower than cost -Indifferent to selling your good/service at cost -Equally happy getting the job or walking away without paying the cost.

56 Producer Surplus Looks at the amount a seller is paid minus the costs

57 Producer surplus is closely related to the supply curve At any quantity, price given on curve shows the cost of the marginal seller - Seller that would leave the market first if the price were any lower

58 Producer surplus is closely related to the supply curve At any quantity, price given on curve shows the cost of the marginal seller - Seller that would leave the market first if the price were any lower

59 Producer Surplus Graphically = the area below price and above the supply curve

60 Producer Surplus How could we increase producer surplus? Raise the price!

61 Producer Surplus Producer Surplus grows for existing producers and we have new producers added in to the equation

62 Calculating Consumer and Producer Surplus How could I calculate consumer and producer surplus? ½ b * h – area of a triangle!

63 Market Efficiency Fundamental Question: Is the allocation of resources determined by free markets desirable?

64 Market Efficiency Total Surplus = Consumer Surplus + Producer Surplus Or Total Surplus = Value to buyers – Amount paid by buyers + Amount received by sellers – Cost to sellers

65 Market Efficiency Total Surplus = Value to buyers – Amount paid by buyers + Amount received by sellers – Cost to sellers The middle terms cancel out leaving: Total Surplus = Value to buyers – Costs to sellers

66 Market Efficiency If we maximize total surplus = Efficiency

67 Market Efficiency For us: Efficiency is all that matters!

68 Market Efficiency What else do actual policy makers have to take into account? Equity We dont talk about this because it is a more normative subject

69 Market Efficiency What else do actual policy makers have to take into account? Equity We dont talk about this because it is a more normative subject

70 Market Efficiency So at equilibrium do we have maximized total surplus???

71 Market Efficiency YES! Equilibrium = Maximized Total Surplus = Efficiency

72 Market Efficiency Three Reasons Why: 1. Free markets allocated the supply of goods to the buyers who value them most highly

73 Market Efficiency Three Reasons Why: 2. Free markets allocate the demand for goods to the sellers who can produce at least cost

74 Market Efficiency Three Reasons Why: 3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.


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