WTP. EFFICIENCY: Demand Supply and SURPLUS

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1 EFFICIENCY: Demand Supply and SURPLUS WTP Willingness to pay is the maximum amount that a buyer will pay for a good. It measures how much the buyer values the good or service. 1

2 CONSUMER SURPLUS Consumer is the buyer s willingness to pay for a good minus the amount the buyer actually pays for it. CONSUMER SURPLUS The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices. 2

3 The Demand Schedule and the Demand Curve Copyright 24 South-Western Figure 1 The Demand Schedule and the Demand Curve Price of Album $1 John s willingness to pay 8 Paul s willingness to pay 7 George s willingness to pay 5 Ringo s willingness to pay Demand Quantity of Albums 3

4 Figure 2 Measuring Consumer Surplus with the Demand Curve Price of Album $1 (a) Price = $8 John s consumer ($2) Demand Quantity of Albums Figure 2 Measuring Consumer Surplus with the Demand Curve Price of Album $1 8 7 (b) Price = $7 John s consumer ($3) Paul s consumer ($1) 5 Total consumer ($4) Demand Quantity of Albums 4

5 Using the Demand Curve to Measure Consumer Surplus The area below the demand curve and above the price measures the consumer in the market. Figure 3 How the Price Affects Consumer Surplus (a) Consumer Surplus at Price P Price A P 1 Consumer B C Demand Q 1 Quantity 5

6 Figure 3 How the Price Affects Consumer Surplus Price A (b) Consumer Surplus at Price P P 1 Initial consumer B C Consumer to new consumers P 2 D Additional consumer to initial consumers E F Demand Q 1 Q 2 Quantity What Does Consumer Surplus Measure? Consumer, 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. 6

7 PRODUCER SURPLUS Producer is the amount a seller is paid for a good minus the seller s cost. It measures the benefit to sellers participating in a market. Using the Supply Curve to Measure Producer Surplus Just as consumer is related to the demand curve, producer is closely related to the supply curve. 7

8 The Supply Schedule and the Supply Curve Figure 4 The Supply Schedule and the Supply Curve 8

9 Using the Supply Curve to Measure Producer Surplus The area below the price and above the supply curve measures the producer in a market. Figure 5 Measuring Producer Surplus with the Supply Curve (a) Price = $6 Price of House Painting Supply $ Grandma s producer ($1) Quantity of Houses Painted 9

10 Figure 5 Measuring Producer Surplus with the Supply Curve Price of House Painting $9 8 Total producer ($5) (b) Price = $8 Supply 6 5 Georgia s producer ($2) Grandma s producer ($3) Quantity of Houses Painted Figure 6 How the Price Affects Producer Surplus (a) Producer Surplus at Price P Price Supply P 1 B Producer C A Q 1 Quantity 1

11 Figure 6 How the Price Affects Producer Surplus (b) Producer Surplus at Price P Price Additional producer to initial producers Supply P 2 D E F P 1 B Initial producer C Producer to new producers A Q 1 Q 2 Quantity MARKET EFFICIENCY Consumer and producer may be used to address the following question: Is the allocation of resources determined by free markets in any way desirable? 11

12 MARKET EFFICIENCY Consumer Surplus = Value to buyers Amount paid by buyers Producer Surplus = Amount received by sellers Cost to sellers Total = Consumer + Producer or = Value to buyers Cost to sellers MARKET EFFICIENCY Efficiency is the property of a resource allocation of maximizing the total received by all members of society. 12

13 MARKET EFFICIENCY EFFICIENZA e DIVERSA da EQUITA!!! equity the fairness of the distribution of well-being among the various buyers and sellers. Figure 7 Consumer and Producer Surplus in the Market Equilibrium Price A D Supply Equilibrium price Consumer Producer E Demand B C Equilibrium Quantity quantity 13

14 EFFICIENZA e perdita di benessere Price P A Consumer Deadweight loss Supply (Cmg) P E Producer Demand Q A Efficient quantity Quantity Copyright 24 South-Western 14

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