micro ch07 presentation
TRANSCRIPT
-
5/27/2018 Micro Ch07 Presentation
1/48 2007 Thomson South-Western, all rights reserved
N. GREGORY MANKIW
PowerPointSlides
by Ron Cronovich
7
P R I N C I P L E S O F
FOURTH EDITIONMICROECONOMICS
Consumers, Producers, and the
Efficiency of Markets
-
5/27/2018 Micro Ch07 Presentation
2/481CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
In this chapter, look for the answers to
these questions:
What is consumer surplus? How is it related to
the demand curve?
What is producer surplus? How is it related to the
supply curve?
Do markets produce a desirable allocation of
resources? Or could the market outcome be
improved upon?
-
5/27/2018 Micro Ch07 Presentation
3/482CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Welfare economics
Recall, the allocation of resourcesrefers to:
how much of each good is produced which producers produce it which consumers consume it
Welfare economics:
the study of how the allocation of resources
affects economic well-being
First, we look at the well-being of consumers.
-
5/27/2018 Micro Ch07 Presentation
4/483CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Willingness to Pay (WTP)
A buyers willingness to payfor a good is the
maximum amount the buyer will pay for that good.
WTP measures how much the buyer values thegood.
name WTP
Anthony $250
Chad 175
Flea 300
John 125
Example:4 buyers WTP
for an iPod
-
5/27/2018 Micro Ch07 Presentation
5/484CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
WTP and the Demand Curve
Q: If price of iPod is $200, who will buy an iPod,
and what is quantity demanded?
A:Anthony & Flea will buy an iPod,
Chad & John will not.
Hence, Qd= 2
when P= $200.
name WTP
Anthony $250
Chad 175
Flea 300
John 125
-
5/27/2018 Micro Ch07 Presentation
6/485CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
WTP and the Demand Curve
Derive the
demand
schedule:
4John, Chad,
Anthony, Flea0125
3Chad, Anthony,
Flea126175
2Anthony, Flea176250
1Flea251300
0nobody$301 & up
Qdwho buysP(priceof iPod)
name WTP
Anthony $250
Chad 175
Flea 300
John 125
-
5/27/2018 Micro Ch07 Presentation
7/486CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$50
$100
$150
$200
$250
$300$350
0 1 2 3 4
WTP and the Demand Curve
P Qd
$301 & up 0
251300 1
176250 2
126175 30125 4
P
Q
-
5/27/2018 Micro Ch07 Presentation
8/48
7CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$50
$100
$150
$200
$250
$300$350
0 1 2 3 4
About the Staircase Shape
This Dcurve looks like a staircase
with 4 stepsone per buyer.
P
Q
If there were a huge # of buyers,as in a competitive market,
there would be a huge #of very tiny steps,
and it would lookmore like a smooth
curve.
-
5/27/2018 Micro Ch07 Presentation
9/48
8CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$50
$100
$150
$200
$250
$300$350
0 1 2 3 4
WTP and the Demand Curve
At any Q,
the height ofthe Dcurve is
the WTP of the
marginal buyer,
the buyer whowould leave the
market if Pwere
any higher.
P
Q
Fleas WTP
Anthonys WTP
Chads WTP
JohnsWTP
-
5/27/2018 Micro Ch07 Presentation
10/48
9CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Consumer Surplus (CS)
Consumer surplusis the amount a buyer is willing
to pay minus the buyer actually pays:
CS = WTP P
name WTP
Anthony $250
Chad 175
Flea 300
John 125
Suppose P= $260.
Fleas CS = $300 260 = $40.
The others get no CS because
they do not buy an iPod at thisprice.
Total CS = $40.
-
5/27/2018 Micro Ch07 Presentation
11/48
10CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$50
$100
$150
$200
$250
$300$350
0 1 2 3 4
CS and the Demand Curve
P
Q
Fleas WTP P= $260
Fleas CS =$300260 = $40
Total CS = $40
-
5/27/2018 Micro Ch07 Presentation
12/48
11CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$50
$100
$150
$200
$250
$300$350
0 1 2 3 4
CS and the Demand Curve
P
Q
Fleas WTP
Anthonys WTP
Instead, suppose
P= $220
Fleas CS =$300220 = $80
Anthonys CS =$250220 = $30
Total CS = $110
-
5/27/2018 Micro Ch07 Presentation
13/48
12CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$50
$100
$150
$200
$250
$300$350
0 1 2 3 4
CS and the Demand Curve
P
Q
The lesson:Total CS equals
the area under
the demand curve
above the price,from 0 to Q.
-
5/27/2018 Micro Ch07 Presentation
14/48
13CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
$
CS with Lots of Buyers & a Smooth D Curve
The demand for shoes
D
1000s of pairsof shoes
Price
per pair
At Q= 5(thousand),
the marginal buyeris willing to pay $50
for pair of shoes.
Suppose P= $30.Then his consumer
surplus = $20.
-
5/27/2018 Micro Ch07 Presentation
15/48
14CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
CS with Lots of Buyers & a Smooth D Curve
The demand for shoes
D
CS is the area b/w
P and the Dcurve,from 0 to Q.
Recall: area ofa triangle equals
x base x heightHeight ofthis triangle is$6030 = $30.
So,CS = x 15 x $30
= $225.
h
$
-
5/27/2018 Micro Ch07 Presentation
16/48
15CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
How a Higher Price Reduces CS
D
If Prises to $40,
CS = x 10 x $20= $100.
Two reasons for the
fall in CS.
1. Fall in CSdue to buyersleaving market
2. Fall in CS due to
remaining buyerspaying higher P
-
5/27/2018 Micro Ch07 Presentation
17/48
ACTIVE LEARNING 1:Consumer surplus
16
0
5
10
15
20
25
30
35
4045
50
0 5 10 15 20 25
P$
Q
demand curve
A. Find marginalbuyers WTP atQ= 10.
B.Find CS for
P= $30.Suppose Pfalls to $20.How much will CSincrease due to
C. buyers enteringthe market
D.existing buyerspaying lower price
-
5/27/2018 Micro Ch07 Presentation
18/48
ACTIVE LEARNING 1:Answers
17
0
5
10
15
20
25
30
35
4045
50
0 5 10 15 20 25
P$
Q
demand curve
A.At Q= 10, marginalbuyers WTP is $30.
B.CS = x 10 x $10= $50
P falls to $20.
C. CS for theadditional buyers
= x 10 x $10 = $50
D. Increase in CSon initial 10 units= 10 x $10 = $100
-
5/27/2018 Micro Ch07 Presentation
19/48
18CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Cost and the Supply Curve
name cost
Angelo $10Hunter 20
Kitty 35
A seller will only produce and
sell the good if the price
exceeds his or her cost.
Hence, cost is a measure of
willingness to sell.
Costis the value of everything a seller must give
up to produce a good (i.e., opportunity cost). Includes cost of all resources used to produce
good, including value of the sellers time.
Example: Costs of 3 sellers in the lawn-cuttingbusiness.
-
5/27/2018 Micro Ch07 Presentation
20/48
19CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Cost and the Supply Curve
335 & up
22034
11019
0$09
QsPDerive the supply schedule
from the cost data:
name cost
Angelo $10Hunter 20
Kitty 35
-
5/27/2018 Micro Ch07 Presentation
21/48
20CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Cost and the Supply Curve
$0
$10
$20
$30
$40
0 1 2 3
P
Q
P Qs
$09 0
1019 12034 2
35 & up 3
-
5/27/2018 Micro Ch07 Presentation
22/48
21CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$10
$20
$30
$40
0 1 2 3
Cost and the Supply Curve
P
Q
At each Q, the
height of the Scurve
is the cost of the
marginal sel ler,
the seller who would
leave the market if
the price were any
lower.
Kittyscost
Hunterscost
Angelos cost
-
5/27/2018 Micro Ch07 Presentation
23/48
22CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$10
$20
$30
$40
0 1 2 3
Producer Surplus
P
Q
Producer surplus (PS):
the amount a seller
is paid for a good
minus the sellers cost.
PS = Pcost
-
5/27/2018 Micro Ch07 Presentation
24/48
23CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
$0
$10
$20
$30
$40
0 1 2 3
Producer Surplus and the S Curve
P
Q
PS = Pcost
Suppose P= $25.
Angelos PS = $15
Hunters PS = $5Kittys PS = $0
Total PS = $20
Kittyscost
Hunterscost
Angelos cost
Total PS equals the
area above the supply
curve under the price,
from 0 toQ
.
-
5/27/2018 Micro Ch07 Presentation
25/48
24CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
PS with Lots of Sellers & a Smooth S Curve
The supply of shoes
S
1000s of pairsof shoes
Price
per pair
Suppose P= $40.
At Q= 15(thousand),
the marginal sellers
cost is $30,
and her producersurplus is $10.
-
5/27/2018 Micro Ch07 Presentation
26/48
25CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
PS with Lots of Sellers & a Smooth S Curve
The supply of shoes
S
PS is the area b/w
P and the Scurve,from 0 to Q.
The height of this
triangle is
$4015 = $25.
So,
PS = x bx h
= x 25 x $25= $312.5
h
-
5/27/2018 Micro Ch07 Presentation
27/48
26CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
How a Lower Price Reduces PS
If P falls to $30,
PS = x 15 x $15
= $112.5
Two reasons for
the fall in PS.
S
1. Fall in PSdue to sellersleaving market
2. Fall in PS due to
remaining sellersgetting lower P
-
5/27/2018 Micro Ch07 Presentation
28/48
ACTIVE LEARNING 2:Producer Surplus
27
0
5
10
15
20
25
30
35
4045
50
0 5 10 15 20 25
P
Q
supply curve
A. Find marginalsellers costat Q= 10.
B. Find PS for
P= $20.Suppose Prises to $30.Find the increasein PS due to
C. selling 5additional units
D. getting a higher priceon the initial 10 units
-
5/27/2018 Micro Ch07 Presentation
29/48
ACTIVE LEARNING 2:Answers
28
0
5
10
15
20
25
30
35
4045
50
0 5 10 15 20 25
P
Q
supply curve
A.At Q= 10,marginal cost = $20
B.PS = x 10 x $20= $100
P rises to $30.
C. PS onadditional units
= x 5 x $10 = $25D. Increase in PS
on initial 10 units= 10 x $10 = $100
-
5/27/2018 Micro Ch07 Presentation
30/48
29CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
What Do CS, PS, and Total Surplus Measure?
CS = (value to buyers)(amount paid by buyers)
CS measures the benefit buyers receive
from participating in the market.
PS = (amount received by sellers)(cost to sellers)
PS measures the benefit sellers receive
from participating in the market.
Total surplus= CS + PSTS measures the total gains from trade in a market.
-
5/27/2018 Micro Ch07 Presentation
31/48
30CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
The Markets Allocation of Resources
In a market economy, the allocation of resources
is decentralized, determined by the interactionsof many self-interested buyers and sellers.
Is the markets allocation of resources desirable?
Or would a different allocation of resources makesociety better off?
To answer this, we use total surplus as a
measure of societys well-being.
-
5/27/2018 Micro Ch07 Presentation
32/48
31CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Measuring Societys Well-Being
Total surplus
= CS + PS
= (value to buyers)(amount paid by buyers)
+ (amount received by sellers)(cost to sellers)
= (value to buyers)(cost to sellers)
-
5/27/2018 Micro Ch07 Presentation
33/48
32CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Efficiency
An allocation of resources is efficientif it maximizes
total surplus. Efficiency means:
Raising or lowering the quantity of a goodwould not increase total surplus. The goods are being produced by the producers
with lowest cost.
The goods are being consumed by the buyerswho value them most highly.
= (value to buyers) (cost to sellers)Total
surplus
-
5/27/2018 Micro Ch07 Presentation
34/48
33CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Efficiency
Efficiency means making the pie as big as
possible.
In contrast, equityrefers to whether the pie isdivided fairly.
Whats fair is subjective, harder to evaluate.
Hence, we focus on efficiency as the goal,even though policymakers in the real world
usually care about equity, too.
= (value to buyers) (cost to sellers)Total
surplus
-
5/27/2018 Micro Ch07 Presentation
35/48
34CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Evaluating the Market Equilibrium
Market eqm:
P= $30Q= 15,000
Total surplus
= CS + PS
Is the market eqm
efficient?
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
S
D
CS
PS
-
5/27/2018 Micro Ch07 Presentation
36/48
35CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Which Buyers Get to Consume the Good?
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
S
D
Every buyer
whose WTP is $30 will buy.
Every buyer
whose WTP is< $30 will not.
So, the buyers who
value the good most
highly are the ones
who consume it.
-
5/27/2018 Micro Ch07 Presentation
37/48
36CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Which Sellers Produce the Good?
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
S
D
Every seller whose
cost is $30 willproduce the good.
Every seller whose
cost is > $30 will
not.
Hence, the sellers
with the lowest cost
produce the good.
-
5/27/2018 Micro Ch07 Presentation
38/48
37CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Does Eqm Q Maximize Total Surplus?
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
S
D
At Q= 20,
cost of producingthe marginal unit
is $35
value to consumers
of the marginal unitis only $20
Hence, can increase
total surplus
by reducing Q.
This is true at any Q
greater than 15.
-
5/27/2018 Micro Ch07 Presentation
39/48
38CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Does Eqm Q Maximize Total Surplus?
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
S
D
At Q= 10,
cost of producingthe marginal unit
is $25
value to consumers
of the marginal unitis $40
Hence, can increase
total surplus
by increasing Q.
This is true at any Q
less than 15.
-
5/27/2018 Micro Ch07 Presentation
40/48
39CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Evaluating the Market Eqm: Summary
The market eqm is efficient:
The eqm Qmaximizes total surplus. The goods are produced by the producers with
lowest cost,
and consumed by the buyers who value themmost highly.
The govt cannot improve on the market outcome.
Laissez faire(French for allow them to do):the govt should not interfere with the market.
-
5/27/2018 Micro Ch07 Presentation
41/48
40CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Why Non-Market Allocations Are Usually Bad
Suppose the allocation of resources were instead
determined by a central planner (e.g., theCommunist leaders of the former Soviet Union.)
To choose an efficient allocation, the planner
would need to know every sellers costand every buyers WTP, for each of the
thousands of goods produced in the economy.
This is practically impossible, so centrally planned
economies are never very efficient.
-
5/27/2018 Micro Ch07 Presentation
42/48
41CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Adam Smith and the Invisible Hand
Man has almost constant occasionfor the help of his brethren, and it is
vain for him to expect it from their
benevolence only.
Adam Smith,1723-1790
Passages from The Wealth of Nations, 1776
He will be more
likely to prevail if he can interest theirself-love in his favor, and show them
that it is for their own advantage to do
for him what he requires of them
It is not from the benevolence of thebutcher, the brewer, or the baker that
we expect our dinner, but from their
regard to their own interest.
-
5/27/2018 Micro Ch07 Presentation
43/48
42CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
Adam Smith and the Invisible Hand
Every individualneither intends topromote the public interest, nor knows
how much he is promoting it.
Adam Smith,1723-1790
Passages from The Wealth of Nations, 1776
He intends only his own gain, and he is
in this, as in many other cases, led byan invisible handto promote an end
which was no part of his intention.
Nor is it always the worse for the society
that it was no part of it. By pursuing hisown interest he frequently promotes
that of the society more effectually than
when he really intends to promote it.
an invisible hand
-
5/27/2018 Micro Ch07 Presentation
44/48
43CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
CONCLUSION This chapter used welfare economics to
demonstrate one of the Ten Principles:
Markets are usually a good way to
organize economic activity.
But we assumed markets are perfectly competitive.
In the real world, sometimes there are
market failures, when unregulated markets fail to
allocate resources efficiently. Causes:
market powera single buyer or seller caninfluence the market price, e.g.monopoly externalitiesside effects of transactions,
e.g.pollution
-
5/27/2018 Micro Ch07 Presentation
45/48
44CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
CONCLUSION
When markets fail, public policy may remedy the
problem and increase efficiency.
Welfare economics sheds light on market
failures and govt policies.
Despite the possibility of market failure,the assumptions in this chapter work well in
many markets, and the invisible hand remains
extremely important.
-
5/27/2018 Micro Ch07 Presentation
46/48
45CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
CHAPTER SUMMARY
The height of the Dcurve reflects the value of thegood to buyerstheir willingness to pay for it.
Consumer surplus is the difference between whatbuyers are willing to pay for a good and what they
actually pay.
On the graph, consumer surplus is the areabetween Pand the Dcurve.
-
5/27/2018 Micro Ch07 Presentation
47/48
46CHAPTER 7 CONSUMERS, PRODUCERS, EFFICIENCY OF MARKETS
CHAPTER SUMMARY
The height of the Scurve is sellers cost ofproducing the good. Sellers are willing to sell ifthe price they get is at least as high as their cost.
Producer surplus is the difference between what
sellers receive for a good and their cost ofproducing it.
On the graph, producer surplus is the areabetween Pand the Scurve.
-
5/27/2018 Micro Ch07 Presentation
48/48
CHAPTER SUMMARY
To measure of societys well-being, we usetotal surplus, the sum of consumer and producer
surplus.
Efficiency means that total surplus is maximized,
that the goods are produced by sellers with lowestcost, and that they are consumed by buyers who
most value them.
Under perfect competition, the market outcome isefficient. Altering it would reduce total surplus.