2. Consumers, Producers, and the Efficiency of Markets Chapter 7 Copyright © 2004 by South-Western,a division of Thomson Learning.

3. Chapter 7 Consumers,producers and the efficiency of markets  examine the link between buyer’s willingness to pay for a good and the demand  learn how to define and measure consumer surplus  examine the link between sellers’ costs of producing a good and the supply curve

4. .learn how to define and measure producer surplus.see that the equilibrium of supply and demand maximizes total surplus in a market

5. Concepts explanation  Welfare economics Welfare economics  willingness to pay willingness to pay  consumer surplus consumer surplus  cost cost  producer surplus producer surplus  efficiency efficiency  equity equity Back

6. Revisiting the Market Equilibrium Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? uMarket equilibrium reflects the way markets allocate scarce resources. u Whether the market allocation is desirable is determined by welfare economics.

7. Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being. uBuyers and sellers receive benefits from taking part in the market. uThe equilibrium in a market maximizes the total welfare of buyers and sellers.

8. Welfare Economics Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product.

9. Welfare Economics  Consumer surplus measures economic welfare from the buyer ’ s side.  Producer surplus measures economic welfare from the seller ’ s side.

10. Consumer Surplus uWillingness to pay is the maximum price that a buyer is willing and able to pay for a good. uIt measures how much the buyer values the good or service.

11. Consumer Surplus Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

12. Four Possible Buyers’ Willingness to Pay...

13. Consumer Surplus The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices.

14. Four Possible Buyers’ Willingness to Pay...

15. Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1234 Quantity of Albums John’s willingness to pay Paul’s willingness to pay George’s willingness to pay Ringo’s willingness to pay Demand

16. Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1234 Quantity of Albums Demand John’s consumer surplus ($20) Price = $80

17. Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1234 Quantity of Albums Demand John’s consumer surplus ($30) Total consumer surplus ($40) Price = $70 Paul’s consumer surplus ($10)

18. Measuring Consumer Surplus with the Demand Curve The area below the demand curve and above the price measures the consumer surplus in the market.

19. Q2Q2 P2P2 How the Price Affects Consumer Surplus... Quantity Price 0 Demand Copyright © 2001 by Harcourt, Inc. All rights reserved Initial consumer surplus Additional consumer surplus to initial consumers Consumer surplus to new consumers Q1Q1 P1P1 DE F B C A

20. Consumer Surplus and Economic Well-Being Consumer surplus, the amount that buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it.

21. Producer Surplus uProducer surplus is the amount a seller is paid minus the cost of production. uIt measures the benefit to sellers participating in a market.

22. The Costs of Four Possible Sellers...

23. Producer Surplus and the Supply Curve uJust as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve. uAt any quantity, the price given by the supply curve shows the cost of the marginal seller, the seller who would leave the market first if the price were any lower.

24. Supply Schedule for the Four Possible Sellers...

25. Producer Surplus and the Supply Curve... Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 123 4 Grandma’s cost Georgia’s cost Frida’s cost Mary’s cost Supply

26. The area below the price and above the supply curve measures the producer surplus in a market. Producer Surplus and the Supply Curve

27. Measuring Producer Surplus with the Supply Curve... Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 123 4 Supply Grandma’s producer surplus ($100) Price = $600

28. Measuring Producer Surplus with the Supply Curve... Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 123 4 Supply Grandma’s producer surplus ($300) Price = $800 Georgia’s producer surplus ($200) Total producer surplus ($500)

29. P2P2 Q2Q2 How Price Affects Producer Surplus... Quantity Price 0 Supply Q1Q1 P1P1 A B C Initial Producer surplus Additional producer surplus to initial producers D E F Producer surplus to new producers

30. Market Efficiency Consumer surplus and producer surplus may be used to address the following question: Is the allocation of resources determined by free markets in any way desirable?

31. Economic Well-Being and Total Surplus and Consumer Surplus = Value to buyers _ Amount paid by buyers Producer Surplus = Amount received by sellers _ Cost to sellers

32. Economic Well-Being and Total Surplus or Total Surplus = Value to buyers _ Cost to sellers Total Surplus = Consumer Surplus Producer Surplus +

33. Market Efficiency Market efficiency is achieved when the allocation of resources maximizes total surplus.

34. Market Efficiency In addition to market efficiency, a social planner might also care about equity – the fairness of the distribution of well-being among the various buyers and sellers.

35. Evaluating the Market Equilibrium... Price Equilibrium price 0Quantity Equilibrium quantity A Supply C B Demand D E

36. Consumer and Producer Surplus in the Market Equilibrium... Price Equilibrium price 0Quantity Equilibrium quantity A Supply C B Demand D E Producer surplus Consumer surplus

37. Three Insights Concerning Market Outcomes uFree markets allocate the supply of goods to the buyers who value them most highly. uFree markets allocate the demand for goods to the sellers who can produce them at least cost. uFree markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.

38. Price 0 Quantity Equilibrium quantity Supply Demand Cost to sellers Value to buyers Cost to sellers Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. The Efficiency of the Equilibrium Quantity

39. uBecause the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it. （让市场自己找出结果） u （完全放开的政策） This policy of leaving well enough alone goes by the French expression laissez faire. （让他们自有行事吧）

40. Market Power uIf a market system is not perfectly competitive, market power may result. uMarket power is the ability to influence prices. （ e.g. 垄断） uMarket power can cause markets to be inefficient because it keeps price and quantity from the equilibrium of supply and demand.

41. Externalities Externalities are created when a market outcome affects individuals other than buyers and sellers in that market. （负外部 性：污染；正外部性：果农和养蜂人） uExternalities cause welfare in a market to depend on more than just the value to the buyers and cost to the sellers. uWhen buyers and sellers do not take externalities into account when deciding how much to consume and produce, the equilibrium in the market can be inefficient.

42. Summary uConsumer surplus measures the benefit buyers get from participating in a market. uConsumer surplus can be computed by finding the area below the demand curve and above the price.

43. Summary uProducer surplus measures the benefit sellers get from participating in a market. uProducer surplus can be computed by finding the area below the price and above the supply curve.

44. Summary uThe equilibrium of demand and supply maximizes the sum of consumer and producer surplus. uThis is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. uMarkets do not allocate resources efficiently in the presence of market failures.

45. Summary uAn allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient. uPolicymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.

46. Graphical Review

47. Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1234 Quantity of Albums John’s willingness to pay Paul’s willingness to pay George’s willingness to pay Ringo’s willingness to pay Demand

48. Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1234 Quantity of Albums Demand John’s consumer surplus ($20) Price = $80

49. Measuring Consumer Surplus with the Demand Curve... Price of Album 50 70 80 0 $100 1234 Quantity of Albums Demand John’s consumer surplus ($30) Total consumer surplus ($40) Price = $70 Paul’s consumer surplus ($10)

50. How the Price Affects Consumer Surplus... Q2Q2 P2P2 Quantity Price 0 Demand Copyright © 2001 by Harcourt, Inc. All rights reserved Initial consumer surplus Additional consumer surplus to initial consumers Consumer surplus to new consumers Q1Q1 P1P1 B C A DE F

51. Producer Surplus and the Supply Curve... Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 123 4 Grandma’s cost Georgia’s cost Frida’s cost Mary’s cost Supply

52. Measuring Producer Surplus with the Supply Curve... Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 123 4 Supply Grandma’s producer surplus ($100) Price = $600

53. Measuring Producer Surplus with the Supply Curve... Quantity of Houses Painted Price of House Painting 500 800 $900 0 600 123 4 Supply Grandma’s producer surplus ($300) Price = $800 Georgia’s producer surplus ($200) Total producer surplus ($500)

54. How Price Affects Producer Surplus... P2P2 Q2Q2 Quantity Price 0 Supply Q1Q1 P1P1 A B C Initial Producer surplus Additional producer surplus to initial producers D E F Producer surplus to new producers

55. Evaluating the Market Equilibrium... Price Equilibrium price 0Quantity Equilibrium quantity A Supply C B Demand D E

56. Consumer and Producer Surplus in the Market Equilibrium... Price Equilibrium price 0Quantity Equilibrium quantity A Supply C B Demand D E Producer surplus Consumer surplus

57. Price 0 Quantity Equilibrium quantity Supply Demand Cost to sellers Value to buyers Cost to sellers Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. The Efficiency of the Equilibrium Quantity

58. 结 束 谢 谢！！