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1、1 of 39WHAT YOU WILL LEARN IN THIS CHAPTERchapter: 42009 Worth PublishersConsumer and Producer Surplus2 of 39WHAT YOU WILL LEARN IN THIS CHAPTERHow much benefit do producers and consumers receive from the existence of a market?How is the welfare of consumers and producers affected by changes in mark
2、et prices?How are these concepts related to the demand and supply curve? Consumer SurplusProducer SurplusCost Market Failure3 of 39A consumers willingness to pay for a good is the maximum price at which he or she would buy that good.Individual consumer surplus is the net gain to an individual buyer
3、from the purchase of a good. It is equal to the difference between the buyers willingness to pay and the price paid. Consumer Surplus and the Demand Curve4 of 39$5945352510543210D$5945351025AleishaBradClaudiaDarrenEdwinaPrice of bookQuantity of booksPotential buyersWillingness to payAleishaBradClaud
4、iaDarrenEdwina The Demand Curve for Used TextbooksA consumers willingness to pay for a good is the maximum price at which he or she would buy that good.5 of 39Willingness to Pay and Consumer SurplusTotal consumer surplus is the sum of the individual consumer surpluses of all the buyers of a good.The
5、 term consumer surplus is often used to refer to both individual and total consumer surplus.6 of 39Consumer Surplus in the Used Textbook Market Price = $30Aleishas consumer surplus: $59-$39=$29Brads consumer surplus: $45-$30=$15Claudias consumer surplus: $35-$30=$5The total consumer surplus is given
6、 by the entire shaded area - the sum of the individual consumer surpluses of Aleisha, Brad, and Claudia - equal to $29 + $15 + $5 = $49.543210AleishaBradClaudiaDarrenDEdwina$594535301025Price of bookQuantity of books7 of 39Consumer Surplus in the Used Textbook Market8 of 39Consumer SurplusThe total
7、consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price.DConsumer surplus1 million0$1,500Price of computersQuantity of computersPrice = $1,5009 of 39A fall in the price of a good increases consumer surplus through two channe
8、ls:A gain to consumers who would have bought at the original price and A gain to consumers who are persuaded to buy by the lower price. How Changing Prices Affect Consumer Surplus10 of 39Consumer Surplus and a Fall in the Price of Used TextbooksDarrens consumer surplusIncrease in Aleishas consumer s
9、urplusIncrease in Brads consumer surplusIncrease in Claudes consumer surplus543210D$59453530102520AleishaBradClaudiaDarrenEdwinaPrice of bookQuantity of booksOriginal price = $30New price = $2011 of 39A Fall in the Market Price Increases Consumer SurplusIncrease in consumer surplus to original buyer
10、s1 million0200,0001,500$5,000Price of computersQuantity of computersConsumer surplus gained by new buyersD12 of 39FOR INQUIRING MINDSA Matter of Life and DeathEach year, about 4,000 people in the United States die while waiting for a kidney transplant. According to the current United Network for Org
11、an Sharing guidelines, a donated kidney goes to the person who has waited the longest regardless of their age.The UNOS is now devising a new set of guidelines where kidneys would be allocated on the basis of who will receive the greatest net benefit, where net benefit is measured as the increase in
12、lifespan from the transplant. This would increase the recipients extra years by 11,000.The “net benefit concept is like consumer surplus: the individual consumer surplus generated from getting a new kidney.13 of 39ECONOMICS IN ACTIONWhen Money Isnt EnoughThe key insight we get from the concept of co
13、nsumer surplus is that purchases yield a net benefit to the consumer. The consumer typically pays a price less than his or her willingness to pay.Most of the time we dont think about the value associated with the right to buy a good.During World War II, government officials created a system of ratio
14、ning goods where coupons gave individuals the right to buy goods at the government-regulated price.As a result, illegal markets in meat stamps and gas coupons emerged. Also, criminals began stealing and counterfeiting coupons.People who bought ration coupons on the illegal market were paying for the
15、 right to get some consumer surplus.14 of 39Producer Surplus and the Supply CurveA potential sellers cost is the lowest price at which he or she is willing to sell a good.Individual producer surplus is the net gain to a seller from selling a good. It is equal to the difference between the price rece
16、ived and the sellers cost. Total producer surplus in a market is the sum of the individual producer surpluses of all the sellers of a good.15 of 39543210EngelbertS$453525515DonnaCarlosBettyAndrewPrice of bookQuantity of booksCostPotential sellers$515253545EngelbertDonnaCarlosBettyAndrewThe Supply Cu
17、rve for Used Textbooks16 of 39Producer Surplus in the Used Textbook MarketBettys producer surplusAndrews producer surplusCarloss producer surplusPrice = $30 543210S$45353025515Price of bookQuantity of booksEngelbertDonnaCarlosBettyAndrew17 of 39Producer SurplusThe total producer surplus from sales o
18、f a good at a given price is the area above the supply curve but below that price.SProducer surplus$51 million0Price of wheat (per bushel)Quantity of wheat (bushels)Price = $518 of 39When the price of a good rises, producer surplus increases through two channels: The gains of those who would have su
19、pplied the good even at the original, lower price and The gains of those who are induced to supply the good by the higher price.Changes in Producer Surplus19 of 39A Rise in the Price Increases Producer SurplusS1.5 million$751 million0Price of wheat (per bushel)Quantity of wheat (bushels)Increase in
20、producer surplus to original sellersConsumer surplus gained by new sellers20 of 39ECONOMICS IN ACTIONWhen the Corn Is HighThe government encouraged the use of gasoline that contains a percentage of ethanol in order to fight air pollution and to reduce U.S. dependence on foreign oil.The average value
21、 of farmland in Iowa hit a record high in 2006.One result of the shift to ethanol fuel has been a rise in the demand for corn, leading to a surge in corn prices. Corn prices rose from $1.85 a bushel in late 2005 to about $4 a bushel in early 2007.A person who buys a farm in Iowa buys the producer su
22、rplus that farm generates. Higher prices for corn, which raised the producer surplus of Iowa farmers, made Iowa farmland more valuable.21 of 39Putting It Together: Total SurplusThe total surplus generated in a market is the total net gain to consumers and producers from trading in the market. It is
23、the sum of the producer and the consumer surplus.The concepts of consumer surplus and producer surplus can help us understand why markets are an effective way to organize economic activity.22 of 39Total SurplusSDPrice of bookQuantity of books1,000$300Equilibrium quantityEquilibrium priceProducer sur
24、plusConsumer surplusE23 of 39Consumer Surplus, Producer Surplus,and the Gains from Trade The previous graph shows that both consumers and producers are better off because there is a market in this good, i.e. there are gains from trade. These gains from trade are the reason everyone is better off par
25、ticipating in a market economy than they would be if each individual tried to be self-sufficient.But are we as well off as we could be? This brings us to the question of the efficiency of markets.24 of 39The Efficiency of Markets: A Preliminary ViewClaim: The maximum possible total surplus is achiev
26、ed at market equilibrium. The market equilibrium allocates the consumption of the good among potential consumers and sales of the good among potential sellers in a way that achieves the highest possible gain to society.By comparing the total surplus generated by the consumption and production choice
27、s in the market equilibrium to the surplus generated by a different set of production and consumption choices, we can show that any change from the market equilibrium reduces total surplus.25 of 391.Reallocate consumption among consumerstake the good away from buyers who would have purchased the goo
28、d in the market equilibrium, and give it to potential consumers who wouldnt have bought it in equilibrium.2.Reallocate sales among sellerstake sales away from sellers who would have sold the good in the market equilibrium, and instead compel potential sellers who would not have sold the good in equi
29、librium to sell it.3.Change the quantity tradedcompel consumers and producers to transact either more or less than the equilibrium quantity.Three ways in which you might try to increase the total surplus26 of 39Reallocating Consumption Lowers Consumer SurplusSDLoss in consumer surplus if the book is
30、 taken from Ana and given to Bob1,00030$35250Price of bookQuantity of booksEAB27 of 39Reallocating Sales Lowers Producer SurplusSDELoss in consumer surplus if Yvonne is made to sell the book instead of Xavier1,00030$35250Price of bookQuantity of booksYX28 of 39Changing the Quantity Lowers Total Surp
31、lusSDEYXABLoss in total surplus if the transaction between Ana and Xavier is preventedLoss in total surplus if the transaction between Yvone and Bob is forced1,00030$35250Price of bookQuantity of books30 of 39ECONOMICS IN ACTIONeBay and eFficiencyGarage sales are an old American tradition: they are
32、a way for people to sell items they dont want to others who have some use for them, to benefit both parties. However, many potential beneficial trades are missed because sellers and buyers may not be in position to meet each other due to factors such as distance.eBay provides a way for would-be buye
33、rs and would be sellers of unique or used items to find each other even if they dont live in the same neighborhood or city.The potential gains from trade were evidently large: by late 2007, eBay had 83.2 million active users and in 2007, $60 billion in goods were bought and sold using the service.31
34、 of 39ECONOMICS IN ACTIONeBay and eFficiency32 of 39Market Equilibrium Maximizes Total Surplus1. It allocates consumption of the good to the potential buyers who value it the most, as indicated by the fact that they have the highest willingness to pay.2. It allocates sales to the potential sellers w
35、ho most value the right to sell the good, as indicated by the fact that they have the lowest cost.3. It ensures that every consumer who makes a purchase values the good more than every seller who makes a sale, so that all transactions are mutually beneficial.4. It ensures that every potential buyer
36、who doesnt make a purchase values the good less than every potential seller who doesnt make a sale, so that no mutually beneficial transactions are missed.33 of 39Why Markets Typically Work So WellEconomists have written volumes about why markets are an effective way to organize an economy. In the e
37、nd, well-functioning markets owe their effectiveness to two powerful features: property rights and the role of prices as economic signals.Property rights are the rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose.An economic signal is any piece o
38、f information that helps people make better economic decisions.34 of 39A CaveatIts important to realize that although the market equilibrium maximizes the total surplus, this does not mean that it is the best outcome for every individual consumer and producer.For instance, a price floor that kept th
39、e price up would benefit some sellers.But in the market equilibrium there is no way to make some people better off without making others worse off - and thats the definition of efficiency.35 of 39A Caveat:A market or an economy is inefficient if there are missed opportunities: some people could be m
40、ade better off without making other people worse off.Under certain conditions, market failure occurs and the market produces an inefficient outcome.The three principal sources are:attempts to capture more resources that produce inefficiencies, side effects from certain transactions, and problems in
41、the nature of the goods themselves.A Few Words of Caution36 of 39ECONOMICS IN ACTIONA Great Leap BackwardEconomies in which a central planner, rather than markets, makes consumption and production decisions are known as planned economies. Examples are Russia and many Eastern European countries.Plann
42、ed economies are notorious for their inefficiency, and what is probably the most compelling example is the Great Leap Forward which was instituted in China in the late 1950s by Mao Zedong.Its intention was to speed up the countrys industrialization by shifting from urban to rural manufacturing: farm
43、ing villages were supposed to start producing heavy industrial goods such as steel.The plan backfired as food production fell and at the same time, industrial output declined due to inexperienced rural producers.The results were catastrophic as a famine that followed reduced Chinas population by 30
44、million.37 of 39SUMMARY1.The willingness to pay of each individual consumer determines the demand curve. When price is less than or equal to the willingness to pay, the potential consumer purchases the good. The difference between willingness to pay and price is the net gain to the consumer, the ind
45、ividual consumer surplus.2.Total consumer surplus in a market, the sum of all individual consumer surpluses in a market. A rise in the price of a good reduces consumer surplus; a fall in the price increases consumer surplus.3.The cost of each potential producer, the lowest price at which he or she i
46、s willing to supply a unit of that good, determines the supply curve. If the price of a good is above a producers cost, a sale generates a net gain to the producer, known as the individual producer surplus.38 of 39SUMMARY4.Total producer surplus in a market, the sum of the individual producer surplu
47、ses in a market, is equal to the area above the market supply curve but below the price. 5.Total surplus, the total gain to society from the production and consumption of a good, is the sum of consumer and producer surplus.6.Usually, markets are efficient and achieve the maximum total surplus. Gover
48、nment intervention in a market that reduces efficiency but increases equity can also be a valid choice by society.7.The keys to the efficiency of a market economy are property rights and the operation of prices as economic signals. Under certain conditions, market failure occurs, making a market inefficient. 39 of 39The End of Chapter 4Coming attraction:Chapter 5: The Market Strikes Back
