1. Market for Aspirin in India

2. Consumer Surplus Consumer surplus is the maximum amount a buyer is willing to pay (WTP) for a good minus the amount he or she actually pays for it. My WTP for a Starbucks Venti > $2.25 Difference is my consumer surplus… makes me smile >

3. I blacked out constantly. My migraine problem got worse and I didnt feel like eating a thing. Amosha, call centre worker Willingness to Pay for Aspirin (Rs per pack) Amosha Aditya 100 80 Kali Pranav 70 50 Call Centre Workers

4. Price of Aspirin (Rs) Demand Curve of the Four Call Centre Workers Quantity of Aspirin (#) 1 2 3 4 WTP (Rs) Amosha100 Aditya80 Kali70 Pranav50 1 2 3 4 D

5. Price of Aspirin (Rs) Quantity of Aspirin (#) 1 2 3 4 WTP (Rs) Amosha100 Aditya80 Kali70 Pranav50 D Suppose P MKT = 60 R P MKT AmoshasC onsumer Surplus= 40 R Aditvas 20 R Kalis 10 R Consumer Surplus = area under D and above Price Where is Consumer Surplus?

6. Price Market for Chardonnays, 2002-2003 P 2002 S 2002 D 2002 Q 2002 Quantity August 17, 2003 $2 wine may have drained grape glut

7. August 17, 2003 $2 wine may have drained grape glut Price Market for Chardonnays, 2002-2003 P 2002 S 2002 D 2002 = D 2003 Q 2002 Quantity S 2003 Q 2003 P 2003 =$2 A B Consumer Surplus 2002 2003 AB + A B CS due to Price

8. Producer Surplus Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes). Cost per Venti coffee$0.05 Cost per Venti coffee$0.05 cup/lid$0.09 Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 store$0.29 New Albany Starbucks Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 store$0.29 baristas$0.41 Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 store$0.29 baristas$0.41 managers (& up)$0.59 Corporate Headquarters Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 store$0.29 baristas$0.41 managers (& up)$0.59 taxes$0.34 Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 store$0.29 baristas$0.41 managers (& up)$0.59 taxes$0.34 Total$1.91 Producer Surplus = Price – WTA = $2.25 – $1.91 = $0.34

9. Producer Surplus Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes). Cost per Venti coffee$0.05 cup/lid$0.09 cream$0.14 store$0.29 baristas$0.41 managers (& up)$0.59 taxes$0.34 Total$1.91 real resources transfer

10. Where is Producer Surplus? The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task. Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna. Price of Bluefin Tuna ($ per lb) Quantity of Bluefin Tuna S Height to Supply Curve = opp cost of catching that bluefin tuna Seiners Stick Boats Lobster Draggers

11. Price Quantity Where is Producer Surplus? The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task. Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna. Q 2006 P 2006 D 2006 S 2006 Producer Surplus 2006 2007 A A Q 2007 P 2007 D 2007 B AB +

12. The Beauty of Competitive Markets 2.5 billion Rs 1.25 billion Rs CONSUMER SURPLUS: area under demand & above price over the range of output PRODUCER SURPLUS: area above supply & below price over the range of output

13. (Perfectly) competitive markets are efficient, meaning that they maximize social surplus (= sum of consumer and producer surplus). The Beauty of (Perfectly) Competitive Markets

14. No Cure in Sight, As Aspirin Crisis Worsens Times of India Formulation /StrengthPack Size Ceiling Price (Rs.) (Uncoated) Aspirin - 162.5 mg Clopidogrel- 75 mg 10's Strip/Blister 25 Source: National Pharmaceuticals Pricing Authority, Ministry of Chemicals and Fertilizers What is the disease?Price Ceilings What are the symptoms?Shortages Imposed June 29, 2001

15. P MAX QQ ds Shortage The Effect of Imposing a Price Ceiling on Aspirin

16. P MAX QQ ds The Effect of Imposing a Price Ceiling on Aspirin Consumer Surplus before Price Ceiling Producer Surplus before Price Ceiling Deadweight Loss (DWL) = Loss in Social Surplus due to the Price Ceiling

17. P MAX s Q Interpreting Deadweight Losses Quantity Consumed & Produced under the price ceiling Quantity Consumed & Produced without the price ceiling Q to Q MKT Why? s are not produced despite benefit (WTP) > opp cost for each Q. Net benefits = forgone DWL

18. Winners and Losers from Price Ceilings Producers are losers Indian Aspirin Market, 2000-2007 D 2000 =D 2007 S 2000 =S 2007 Price (R per pack) Quantity (millions of packs per month) Producer Surplus 2000 2007 R S T U V Producer Surplus 2000T+U+V 2007 Producer Surplus 2000T+U+V 2007V T+U Loss in Producer Surplus

19. Winners and Losers from Price Ceilings Consumers can be either winners (T > S) or losers (T < S) Indian Aspirin Market, 2000-2007 D 2000 =D 2007 S 2000 =S 2007 Price (R per pack) Quantity (millions of packs per month) Consumer Surplus 2000 2007 R S T U V Consumer Surplus 2000R+S 2007 Consumer Surplus 2000R+S 2007R+T T – S Change in Consumer Surplus

20. Price ($ per bag) Quantity (millions of bags per year) Market for Brazilian Coffee, 1907-1908 S D Supply and Demand P = 15 – 0.5 Q

21. Supply and Demand Why is demand downward sloping? 1.Substitution Effect – As price falls, it makes sense to substitute coffee for tea. 2.Income EffectAs price fall, incomes of coffee drinkers increase, inducing them to consume more coffee (and other stuff).

22. Price ($ per bag) Quantity (millions of bags per year) Market for Brazilian Coffee, 1907-1908 S D Supply and Demand P = 15 – 0.5 Q

23. Price ($ per bag) Quantity (millions of bags per year) Market for Brazilian Coffee, 1907-1908 S D Supply and Demand P = 15 – 0.5 Q 1907 excess supply or surplus excess demand or shortage

24. Supply and Demand Welfare Properties of Equilibrium: If P P e then some people can be made better off without anyone else being made worse off. Two important functions of price: 1.Rationing Function 2.Allocative Functionsends signals to direct resources to their highest value uses.

25. Determinants of Supply and Demand Determinants of Demand: 1.Income (normal versus inferior good) 2.Prices of Complements & Substitutes 3.Tastes 4.Expectations 5.Population Determinants of Supply: 1.Technology 2.Factor Prices 3.Number of Suppliers 4.Expectations 5.Weather

26. New York Times, August 10, 1908 Brazilian Coffee Law: Price Ceiling of $10 per bag

27. Price ($ per bag) Quantity (millions of bags per year) Market for Brazilian Coffee, 1907-1908 S D Supply and Demand 1907 P Min price floor

28. Price ($ per bag) Quantity (millions of bags per year) Market for Brazilian Coffee, 1907-1908 S D Supply and Demand 1907 P Min price floor S 1913 new trees

29. Along with the price floor, Brazil also imposed a prohibitory tax on new trees. The New York Times, Sep 13, 1908 Suppose the tax is imposed on the sellers of trees