Market Equilibrium in Perfect Competition What do buyers and sellers get out of the market? And Why do economists think this is efficient?

Equilibrium (cont’d)

At the market equilibrium price: Quantity demanded by consumers = quantity supplied by firms/producers/sellers Without a change in any of the ceterius paribus conditions, the price will remain unchanged What does EQUILIBRIUM mean?

Consumer Surplus Demand Curve is Also Marginal Value and Avg Revenue Amount Paid CS Total WTP = CS + Amt Paid

Producer Surplus The difference between what they get paid (total revenues) and what it costs them Total Revenues > = Average Price x Quantity Purchased Total Costs > = Sum of Marginal Costs up to the amount supplied (Q S ) Or = the area under the supply curve up to Q s What Do Sellers Get Out of This?

What is the Value of the Market Value of the market To Consumers = Consumer Surplus To Producers = Producer Surplus Value equals the sum of both CS and PS

 Evaluating the market equilibrium  Market outcomes 1.Free markets allocate the supply of goods to the buyers who value them most highly  Measured by their willingness to pay 2.Free markets allocate the demand for goods to the sellers who can produce them at the least cost  Only produce if you are paid as much (or more) than product costs to make (MC) 7 Market Efficiency

 Evaluating the market equilibrium ◦ Social planner  Cannot increase economic well-being by  Changing the allocation of consumption among buyers  Changing the allocation of production among sellers  Cannot rise total economic well-being by  Increasing or decreasing the quantity of the good 3.Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus 8 Market Efficiency

The efficiency of the equilibrium quantity 8 9 Price At quantities less than the equilibrium quantity, such as Q 1, the value to buyers exceeds the cost to sellers. At quantities greater than the equilibrium quantity, such as Q 2, the cost to sellers exceeds the value to buyers. Therefore, the market equilibrium maximizes the sum of producer and consumer surplus. 0 Quantity Equilibrium quantity Demand Supply Q1Q1 Q2Q2 Value to buyers Value to buyers Cost to sellers Cost to sellers Value to buyers is greater than cost to sellers Value to buyers is less than cost to sellers

Evaluating the market equilibrium Equilibrium outcome Efficient allocation of resources Consumers: Goods to those who value it most (MV >= P) Suppliers Goods produced by those with least costs/most efficient production (P>MC) Efficient use of resources Produce only goods whose value is >= cost of using the resources 10 Market Efficiency