Consumers, Producers, and the Efficiency of Markets

Transcription

1 217/1/11 N. GREGORY MANKIW RINCILE OF ECONOMIC Eight Edition CHATER 7 Consumers, roducers, and the Efficiency of Markets 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? o markets produce a desirable allocation of resources? Or could the market outcome be improvedupon? Modified by Joseph Tao-yi Wang remium oweroint lides by: V. Andreea CHIRITECU Eastern Illinois University 1 2 Welfare Economics Allocation of resources refers to: How much of each good is produced Which producers produce it Which consumers consume it Welfare economics tudies how the allocation of resources affects economic well-being Willingness to ay (WT) A buyer s willingness to pay for a good Maximum amount the buyer will pay for that good How much the buyer values the good name WT Anthony $2 Kenny 17 uan 3 John 12 Example: 4 buyers WT for an iad 3 4 WT and the emand Curve WT and the emand Curve : If price of iad is $2, who will buy an iad, and what is quantity demanded? erive the demand schedule: (price of iod) $31 & up nobody who buys d name WT Anthony $2 Kenny 17 uan 3 John 12 A: Anthony & uanwill buy an iad, Kenny & John will not. Hence, d = 2 when = $2. name WT Anthony $2 Kenny 17 uan 3 John uan Anthony, uan Kenny, Anthony, uan John, Kenny, Anthony, uan

2 217/1/11 WT and the emand Curve $3 $3 $2 $2 $1 $1 $ $ d $31 & up About the taircase hape $3 $3 $2 $2 $1 $1 $ $ This curve looks like a staircase with 4 steps one per buyer. If there were a huge # of buyers, as in a competitive market, there would be a huge # of very tiny steps, and it would look more like a smooth curve. 8 WT and the emand Curve $3 $3 $2 $2 $1 $1 $ $ uan s WT Anthony s WT Kenny s WT John s WT At any, the height of the curve is the WT of the marginal buyer, the buyer who would leave the market if were any higher. 9 Consumer urplus (C) Consumer surplus C = WT Amount a buyer is willing to pay minus the amount the buyer actually pays: name WT Anthony $2 Kenny 17 uan 3 John 12 uppose = $26. uan sc = $3 26 = $4. The others get no C because they do not buy at this price. Total C = $4. 1 C and the emand Curve $3 $3 $2 $2 $1 $1 $ $ uan s WT = $26 uan s C = $3 26 = $4 Total C = $4 11 C and the emand Curve $3 $3 $2 $2 $1 $1 $ $ uan s WT Anthony s WT Instead, suppose = $22 uan sc = $3 22 = $8 Anthony s C = $2 22 = $3 Total C = $11 Total C equals the area under the demand curve above the price, from to

3 217/1/11 C with Lots of Buyers & a mooth Curve C with Lots of Buyers & a mooth Curve rice per pair $ 6 The demand for shoes C is the area between and the curve, from to. $ 6 The demand for shoes At = (thousand), the marginal buyer is willing to pay $ for pair of shoes. uppose = $3. Then his consumer surplus = $ s of pairs of shoes Recall: area of a triangle equals ½ x base x height Height = $6 3 = $3. o, C = ½ x 1 x $3 = $22. h How a Higher rice Reduces C 1. Fall in C due to buyers leaving market 2. Fall in C due to remaining buyers paying higher If rises to $4, C = ½ x 1 x $2 = $1. Two reasons for the fall in C Active Learning 1 A. Find marginal buyer s WT at = 1. $ 4 B. Find C for = $3 uppose falls to $2. How much will C increase due to C. buyers entering the market. existing buyers paying lower price Consumer surplus demand curve Active Learning 1 A. At = 1, marginal buyer s WT is $3. B. C = ½ x 1 x $1 = $ falls to $2. C. C for the additional buyers = ½ x 1 x $1 = $. Increase in C on initial 1 units = 1 x $1 = $1 $ Answers demand curve Cost roducer urplus Value of everything a seller must give up to produce a good Measure of willingness to sell: produce and sell the good/service only if the price > cost name cost Rosy $1 Chuck 2 Chiang 3 Example: Costs of 3 sellers in the lawn-cutting business. 18 3

4 217/1/11 roducer urplus Cost and the upply Curve erive the supply schedule from the cost data: $ s 1 $4 $3 s $ name cost Rosy $ & up 2 3 $2 $ & up 3 Chuck 2 Chiang 3 $ Cost and the upply Curve roducer urplus $4 $3 $2 $1 Chuck s cost Rosy s cost Chiang s cost At each, the height of the curve is the cost of the marginal seller, the seller who would leave the market if the price were any lower. roducer surplus, = -cost Amount a seller is paid for a good minus the seller s cost of providing it rice received minus willingness to sell $ roducer urplus and the Curve $4 $3 $2 $1 $ Chuck s cost Rosy s cost Chiang s cost = cost uppose = $2. Rosy s = $1 Chuck s = $ Chiang s = $ Total = $2 Total equals the area above the supply curve under the price, from to. with Lots of ellers & a mooth Curve uppose = $4. rice per pair At = 1(thousand), the marginal seller s cost is $3, and her producer surplus is $ The supply of shoes s of pairs of shoes

5 217/1/11 with Lots of ellers & a mooth Curve How a Lower rice Reduces is the area between and the curve, from to. The height of this triangle is $4 1 = $2. o, = ½ x b x h = ½ x 2 x $2 = $312. The supply of shoes h If falls to $3, = ½ x 1 x $1 = $112. Two reasons for the fall in. 2. Fall in due to remaining sellers getting lower Fall in due to sellers leaving market Active Learning 1 A. Find marginal seller s cost at = 1. B. Find total for = $2. uppose rises to $3. Find the increase in due to: C. selling additional units. getting a higher price on the initial 1 units roducer surplus supply curve Active Learning 1 A. At = 1, marginal cost = $2 B. = ½ x 1 x $2 = $1 rises to $3. C. on additional units = ½ x x $1 = $2. Increase in on initial 1 units = 1 x $1 = $ roducer surplus supply curve Market Efficiency Total surplus = C + Consumer surplus = Value to buyers Amount paid by buyers Buyers gains from participating in the market roducer surplus = Amount received by sellers Cost to sellers ellers gains from participating in the market Total surplus = Value to buyers Cost to sellers Market s Allocation of Resources Allocation of resources desirable? ecentralized (in a market economy) etermined by interactions of many selfinterested buyers and sellers Total surplus Measure of society s well-being To consider whether the market s allocation is efficient as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 29 3

6 217/1/11 Market s Allocation of Resources Evaluating the Market Equilibrium Efficient allocation of resources maximizes total surplus 1. The goods are consumed by the buyers who value them most highly 2. The goods are produced by the producers with the lowest costs 3. Raising or lowering the quantity of a good would not increase total surplus Market equilibrium: = $3 = 1 (thousand) Total surplus = C + Is the market equilibrium efficient? C Which Buyers Consume the Good? Which ellers roduce the Good? Every buyer whose WT is $3 will buy. Every buyer whose WT is < $3 will not. The buyers who value the good most highly are the ones who consume it Every seller whose cost is $3 will produce the good. Every seller whose cost is > $3 will not. The sellers with the lowest cost produce the good oes Equilibrium Maximize Total urplus? oes Equilibrium Maximize Total urplus? At = 2, cost of producing the marginal unit is $3 value to consumers of the marginal unit is only $2 Hence, can increase total surplus by reducing. This is true at any greater than At = 1, cost of producing the marginal unit is $2 value to consumers of the marginal unit is $4 Hence, can increase total surplus by increasing. This is true at any less than

7 217/1/11 Adam mith and the Invisible Hand assages from The Wealth of Nations, 1776 Man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-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 the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Georgios Kollidas/hutterstock.com Adam mith, Adam mith and the Invisible Hand assages from The Wealth of Nations, 1776 Every individualneither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to 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 his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. Georgios Kollidas/hutterstock.com Adam mith, Market Efficiency Adam mith s invisible hand Takes all the information about buyers and sellers into account Guides everyone in the market to the best outcome Economic efficiency Free markets Best way to organize economic activity AK THE EXERT upplying Kidneys A market that allows payment for human kidneys should be established on a trial basis to help extend the lives of patients with kidney disease. 39 as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 4 The Guardian posted a touching album of... postings on streets around hospitals offering to sell organs. The posts advertise blood type A, B, O... Kidneys for sale: Iran's trade in organs may/1/kidneys-for-sale-organ-donation-iran Kidney trade in Iran Wikipedia Entry en.wikipedia.org/wiki/kidney_trade_in_iran Even If elling Organs is Not Allowed... hould we ban ALL organ exchanges (even without monetary transfers)? uch as: UCLA Kidney Exchange rogram Kidney WA( 配對交換捐贈 ): aired onor Exchange Transplantation When a donor and a recipient cannot match (blood type, etc.), they can exchange with another pair with similar problems What about 3-way-exchange? 217/1/11 Efficiency and Welfare Joseph Tao-yi Wang 217/1/11 Efficiency and Welfare Joseph Tao-yi Wang 7

8 217/1/11 WA Allowed? Why Not Chain Reaction? Chain Transplantation, Kidney Chain ( 連鎖捐贈 ): Altruistic donor gives to a recipient, whose relative donates to a 2 nd recipient, whose relative donates... 肝肝相連到天邊 6 Lives, 3 Kidneys, All Linked (212/2/18 New York Times) From tart to Finish A donation by a Good amaritan, Rick Ruzzamenti, upper left, set in motion a 6-person chain of transplants that ended with a kidney for onald C. Terry Jr., bottom right. 217/1/11 Efficiency and Welfare Joseph Tao-yi Wang 217/1/11 Efficiency and Welfare Joseph Tao-yi Wang Market esign (rizing Winning Idea 212) Both in the Lab and Field Alvin E. Roth (tanford) (Keynote of 213 EA North American Meeting, anta Cruz) Market Efficiency & Market Failure Forces of supply and demand Allocate resources efficiently Assumptions about how markets work 1. Markets are perfectly competitive 2. Outcome in a market matters only to the buyers and sellers in that market When these assumptions do not hold Market equilibrium is efficient may no longer be true 217/1/11 Efficiency and Welfare Joseph Tao-yi Wang 46 Market Efficiency & Market Failure ummary Market failures Market power: a single buyer or seller (small group) control market prices Markets are inefficient Externalities: decisions of buyers and sellers affect people who are not participants in the market at all Inefficient equilibrium - from the standpoint of society as a whole Consumer urplus: buyers willingness to pay for a good minus the amount they actually pay Measures the benefit buyers get from participating in a market Area below the curve and above roducer urplus: amount sellers receive for their goods minus their costs of production Measures the benefit sellers get from participating in a market Area below and above the curve

9 217/1/11 ummary An allocation of resources that maximizes total surplus is said to be efficient olicymakers are concerned with the efficiency, as well as the equality, of economic outcomes. Equilibrium of and maximizes total surplus 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 (market power or externalities) Chapter 7: Efficiency and Welfare Consumer urplus + roducer urplus = Total urplus (maximized at Equilibrium) Efficiency vs. Equality Homework: Mankiw, Ch.7, roblem 6, 7, /1/11 Efficiency and Welfare Joseph Tao-yi Wang Chapter 7: Efficiency and Welfare Challenge uestions: 28 - (Multiple Choice 6-7) 21 - Essay C (True/False 8) Additional uestions: True or False. If consumers buy 1, heads of lettuce per week, and if the price of lettuce falls by $1 per head, then the consumer surplus will increases by $1,. 217/1/11 Efficiency and Welfare Joseph Tao-yi Wang 9