Consumers,Producers,and
the Efficiency of Markets
Chapter 7
Revisiting the Market Equilibrium
Do the equilibrium price and quantity
maximize the total welfare of buyers
and sellers?
Market equilibrium reflects the way
markets allocate scarce resources,
Whether the market allocation is
desirable is determined by welfare
economics.
Welfare Economics
Welfare economics is the study of how
the allocation of resources affects
economic well-being.
Buyers and sellers receive benefits from
taking part in the market,
The equilibrium in a market maximizes
the total welfare of buyers and sellers,
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.
Consumer surplus measures economic
welfare from the buyer’s side.
Producer surplus measures economic
welfare from the seller’s side.
Consumer Surplus
Willingness to pay is the maximum price
that a buyer is willing and able to pay for
a good.
It measures how much the buyer values
the good or service.
Consumer surplus is the amount a buyer
is willing to pay for a good minus the
amount the buyer actually pays for it.
Four Possible Buyers’
Willingness to Pay...
Who will get the book? What is
the consumer surplus?
What about two textbooks?
Buy er Wil li ngn ess t o Pay
John $100
Pau l 80
Ge orge 70
Ringo 50
Four Possible Buyers’
Willingness to Pay...
Pri ce B u y er
Qu an ti ty
D eman d ed
M ore th an $ 100 None 0
$80 to $1 00 John 1
$70 to $8 0 John,Pau l 2
$50 to $7 0 John,Pau l,Geo rge 3
$50 or less John,P a u l,
G e o r g e,Ringo
4
Price of
Album
50
70
80
0
$100
1 2 3 4 Quantity ofAlbums
John’s willingness to pay
Paul’s willingness to pay
George’s willingness to pay
Ringo’s willingness to pay
Demand
Measuring Consumer Surplus
with the Demand Curve...
Measuring Consumer Surplus
with the Demand Curve...
Price of
Album
50
70
80
0
$100
1 2 3 4 Quantity ofAlbums
Demand
John’s consumer surplus ($20)
Price = $80
Price of
Album
50
70
80
0
$100
1 2 3 4 Quantity ofAlbums
Demand
John’s consumer surplus ($30)
Total consumer
surplus ($40)
Price = $70
Paul’s consumer surplus ($10)
Measuring Consumer Surplus
with the Demand Curve...
The market demand curve depicts the
various quantities that buyers would be
willing and able to purchase at different
prices.
Because the demand curve reflects buyers’
willingness to pay,we can also use it to
measure consumer surplus.
The area below the demand curve and
above the price measures the consumer
surplus in the market.
Measuring Consumer Surplus
with the Demand Curve...
Q2
P2
How the Price Affects
Consumer Surplus...
Quantity
Price
0
Demand
Initial
consumer
surplus
Additional
consumer
surplus to
initial
consumers
Consumer
surplus to new
consumers
Q1
P1
D E F
B C
A
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.
Producer Surplus
Producer surplus is the amount a seller is
paid minus the cost of production,
It measures the benefit to sellers
participating in a market.
The Costs of Four Possible Sellers...
Sell er C o st
M ary $900
F rida 800
Georgia 600
Grandm a 500
Producer Surplus and
the Supply Curve
Just as consumer surplus is related to the
demand curve,producer surplus is closely
related to the supply curve.
At 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.
Supply Schedule for the Four
Possible Sellers...
Price Se ll ers
Q u an tity
Su p p li ed
$ 9 0 0 o r m o re M a ry,F ri d a,Ge o rg i a,
Gr a n d ma
4
$ 8 0 0 to $ 9 0 0 F ri d a,Ge o rg i a,Gr a n d ma 3
$ 6 0 0 to $ 8 0 0 Ge o rg i a,Gr a n d ma 2
$ 5 0 0 to $ 6 0 0 Gr a n d ma 1
L e ss th a n $ 5 0 0 N o n e 0
Producer Surplus and the
Supply Curve...
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1 2 3 4
Grandma’s cost
Georgia’s cost
Frida’s cost
Mary’s cost
Supply
The area below the price and above the
supply curve measures the producer
surplus in a market.
Producer Surplus and the
Supply Curve...
Measuring Producer Surplus
with the Supply Curve...
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1 2 3 4
Supply
Grandma’s producer
surplus ($100)
Price = $600
Measuring Producer Surplus
with the Supply Curve...
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1 2 3 4
Supply
Grandma’s producer
surplus ($300)
Price = $800
Georgia’s producer
surplus ($200)
Total
producer
surplus ($500)
P2
Q2
How Price Affects Producer
Surplus...
Quantity
Price
0
Supply
Q1
P1
A
B
CInitial
Producer
surplus
Additional producer
surplus to initial
producers
D E F
Producer surplus
to new producers
Evaluating the Market
Equilibrium...
Price
Equilibrium
price
0 QuantityEquilibrium
quantity
A
Supply
C
B Demand
D
E
Consumer and Producer Surplus
in the Market Equilibrium...
Price
Equilibrium
price
0 QuantityEquilibrium
quantity
A
Supply
C
B Demand
D
E
Producer
surplus
Consumer
surplus
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?
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
Economic Well-Being and
Total Surplus
or
Total
Surplus =
Value to
buyers _
Cost to
sellers
Total
Surplus =
Consumer
Surplus
Producer
Surplus+
Market Efficiency
Market efficiency is achieved when the
allocation of resources maximizes total
surplus.
Price
0 QuantityEquilibrium
quantity
Supply
Demand
Cost to
sellers
Value
to
buyers
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
Three Insights Concerning
Market Outcomes
Free markets allocate the supply of goods
to the buyers who value them most highly.
Free markets allocate the demand for
goods to the sellers who can produce them
at least cost.
Free markets produce the quantity of
goods that maximizes the sum of
consumer and producer surplus.
The Efficiency of the Market
Because the equilibrium outcome is an
efficient allocation of resources,the social
planner can leave the market outcome as
he/she finds it,
This policy of leaving well enough alone
goes by the French expression laissez faire
(自由放任 ).
Efficiency and Equity
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.
Market Power
If a market system is not perfectly
competitive,market power may result.
Market power is the ability to influence
prices.
Market power can cause markets to be
inefficient because it keeps price and
quantity from the equilibrium of supply
and demand.
Externalities
Externalities are created when a market
outcome affects individuals other than
buyers and sellers in that market.
Externalities cause welfare in a market to
depend on more than just the value to the
buyers and cost to the sellers.
When 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.
Summary
Consumer surplus measures the benefit
buyers get from participating in a market.
Consumer surplus can be computed by
finding the area below the demand curve
and above the price.
Producer surplus measures the benefit
sellers get from participating in a market.
Producer surplus can be computed by
finding the area below the price and above
the supply curve.
Summary
The equilibrium of demand and supply
maximizes the sum of consumer and
producer surplus.
This is as if the invisible hand of the
marketplace leads buyers and sellers to
allocate resources efficiently.
Markets do not allocate resources
efficiently in the presence of market
failures.
Summary
An allocation of resources that maximizes
the sum of consumer and producer
surplus is said to be efficient.
Policymakers are often concerned with the
efficiency,as well as the equity,of
economic outcomes.
Application
Ticket Scalping
Organs Market
Exercise #7
Problems and Applications
– #5,#8,#10
the Efficiency of Markets
Chapter 7
Revisiting the Market Equilibrium
Do the equilibrium price and quantity
maximize the total welfare of buyers
and sellers?
Market equilibrium reflects the way
markets allocate scarce resources,
Whether the market allocation is
desirable is determined by welfare
economics.
Welfare Economics
Welfare economics is the study of how
the allocation of resources affects
economic well-being.
Buyers and sellers receive benefits from
taking part in the market,
The equilibrium in a market maximizes
the total welfare of buyers and sellers,
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.
Consumer surplus measures economic
welfare from the buyer’s side.
Producer surplus measures economic
welfare from the seller’s side.
Consumer Surplus
Willingness to pay is the maximum price
that a buyer is willing and able to pay for
a good.
It measures how much the buyer values
the good or service.
Consumer surplus is the amount a buyer
is willing to pay for a good minus the
amount the buyer actually pays for it.
Four Possible Buyers’
Willingness to Pay...
Who will get the book? What is
the consumer surplus?
What about two textbooks?
Buy er Wil li ngn ess t o Pay
John $100
Pau l 80
Ge orge 70
Ringo 50
Four Possible Buyers’
Willingness to Pay...
Pri ce B u y er
Qu an ti ty
D eman d ed
M ore th an $ 100 None 0
$80 to $1 00 John 1
$70 to $8 0 John,Pau l 2
$50 to $7 0 John,Pau l,Geo rge 3
$50 or less John,P a u l,
G e o r g e,Ringo
4
Price of
Album
50
70
80
0
$100
1 2 3 4 Quantity ofAlbums
John’s willingness to pay
Paul’s willingness to pay
George’s willingness to pay
Ringo’s willingness to pay
Demand
Measuring Consumer Surplus
with the Demand Curve...
Measuring Consumer Surplus
with the Demand Curve...
Price of
Album
50
70
80
0
$100
1 2 3 4 Quantity ofAlbums
Demand
John’s consumer surplus ($20)
Price = $80
Price of
Album
50
70
80
0
$100
1 2 3 4 Quantity ofAlbums
Demand
John’s consumer surplus ($30)
Total consumer
surplus ($40)
Price = $70
Paul’s consumer surplus ($10)
Measuring Consumer Surplus
with the Demand Curve...
The market demand curve depicts the
various quantities that buyers would be
willing and able to purchase at different
prices.
Because the demand curve reflects buyers’
willingness to pay,we can also use it to
measure consumer surplus.
The area below the demand curve and
above the price measures the consumer
surplus in the market.
Measuring Consumer Surplus
with the Demand Curve...
Q2
P2
How the Price Affects
Consumer Surplus...
Quantity
Price
0
Demand
Initial
consumer
surplus
Additional
consumer
surplus to
initial
consumers
Consumer
surplus to new
consumers
Q1
P1
D E F
B C
A
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.
Producer Surplus
Producer surplus is the amount a seller is
paid minus the cost of production,
It measures the benefit to sellers
participating in a market.
The Costs of Four Possible Sellers...
Sell er C o st
M ary $900
F rida 800
Georgia 600
Grandm a 500
Producer Surplus and
the Supply Curve
Just as consumer surplus is related to the
demand curve,producer surplus is closely
related to the supply curve.
At 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.
Supply Schedule for the Four
Possible Sellers...
Price Se ll ers
Q u an tity
Su p p li ed
$ 9 0 0 o r m o re M a ry,F ri d a,Ge o rg i a,
Gr a n d ma
4
$ 8 0 0 to $ 9 0 0 F ri d a,Ge o rg i a,Gr a n d ma 3
$ 6 0 0 to $ 8 0 0 Ge o rg i a,Gr a n d ma 2
$ 5 0 0 to $ 6 0 0 Gr a n d ma 1
L e ss th a n $ 5 0 0 N o n e 0
Producer Surplus and the
Supply Curve...
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1 2 3 4
Grandma’s cost
Georgia’s cost
Frida’s cost
Mary’s cost
Supply
The area below the price and above the
supply curve measures the producer
surplus in a market.
Producer Surplus and the
Supply Curve...
Measuring Producer Surplus
with the Supply Curve...
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1 2 3 4
Supply
Grandma’s producer
surplus ($100)
Price = $600
Measuring Producer Surplus
with the Supply Curve...
Quantity of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1 2 3 4
Supply
Grandma’s producer
surplus ($300)
Price = $800
Georgia’s producer
surplus ($200)
Total
producer
surplus ($500)
P2
Q2
How Price Affects Producer
Surplus...
Quantity
Price
0
Supply
Q1
P1
A
B
CInitial
Producer
surplus
Additional producer
surplus to initial
producers
D E F
Producer surplus
to new producers
Evaluating the Market
Equilibrium...
Price
Equilibrium
price
0 QuantityEquilibrium
quantity
A
Supply
C
B Demand
D
E
Consumer and Producer Surplus
in the Market Equilibrium...
Price
Equilibrium
price
0 QuantityEquilibrium
quantity
A
Supply
C
B Demand
D
E
Producer
surplus
Consumer
surplus
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?
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
Economic Well-Being and
Total Surplus
or
Total
Surplus =
Value to
buyers _
Cost to
sellers
Total
Surplus =
Consumer
Surplus
Producer
Surplus+
Market Efficiency
Market efficiency is achieved when the
allocation of resources maximizes total
surplus.
Price
0 QuantityEquilibrium
quantity
Supply
Demand
Cost to
sellers
Value
to
buyers
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
Three Insights Concerning
Market Outcomes
Free markets allocate the supply of goods
to the buyers who value them most highly.
Free markets allocate the demand for
goods to the sellers who can produce them
at least cost.
Free markets produce the quantity of
goods that maximizes the sum of
consumer and producer surplus.
The Efficiency of the Market
Because the equilibrium outcome is an
efficient allocation of resources,the social
planner can leave the market outcome as
he/she finds it,
This policy of leaving well enough alone
goes by the French expression laissez faire
(自由放任 ).
Efficiency and Equity
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.
Market Power
If a market system is not perfectly
competitive,market power may result.
Market power is the ability to influence
prices.
Market power can cause markets to be
inefficient because it keeps price and
quantity from the equilibrium of supply
and demand.
Externalities
Externalities are created when a market
outcome affects individuals other than
buyers and sellers in that market.
Externalities cause welfare in a market to
depend on more than just the value to the
buyers and cost to the sellers.
When 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.
Summary
Consumer surplus measures the benefit
buyers get from participating in a market.
Consumer surplus can be computed by
finding the area below the demand curve
and above the price.
Producer surplus measures the benefit
sellers get from participating in a market.
Producer surplus can be computed by
finding the area below the price and above
the supply curve.
Summary
The equilibrium of demand and supply
maximizes the sum of consumer and
producer surplus.
This is as if the invisible hand of the
marketplace leads buyers and sellers to
allocate resources efficiently.
Markets do not allocate resources
efficiently in the presence of market
failures.
Summary
An allocation of resources that maximizes
the sum of consumer and producer
surplus is said to be efficient.
Policymakers are often concerned with the
efficiency,as well as the equity,of
economic outcomes.
Application
Ticket Scalping
Organs Market
Exercise #7
Problems and Applications
– #5,#8,#10
