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    Chapter 7 (Consumers, Producers, and The Efficiency of The Markets)

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    Julz Julia
    The document defines key concepts in welfare economics such as consumer surplus, producer surplus, total surplus, and efficient allocation. It explains that an efficient allocation maximizes total surplus, which is the sum of consumer surplus and producer surplus. A benevolent social planner aims to maximize total surplus and economic well-being for all in a society. Free markets are generally efficient because they allocate supply to buyers with highest willingness to pay and demand to sellers with lowest costs, maximizing total surplus.

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    Chapter 7 (Consumers, Producers, and The Efficiency of The Markets)

    Uploaded by

    Julz Julia
    34 views24 pages
    The document defines key concepts in welfare economics such as consumer surplus, producer surplus, total surplus, and efficient allocation. It explains that an efficient allocation maximizes total surplus, which is the sum of consumer surplus and producer surplus. A benevolent social planner aims to maximize total surplus and economic well-being for all in a society. Free markets are generally efficient because they allocate supply to buyers with highest willingness to pay and demand to sellers with lowest costs, maximizing total surplus.

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    Chapter 7 (Consumers, Producers, and the Efficiency of the Markets)

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    The document defines key concepts in welfare economics such as consumer surplus, producer surplus, total surplus, and efficient allocation. It explains that an efficient allocation maximizes total surplus, which is the sum of consumer surplus and producer surplus. A benevolent social planner aims to maximize total surplus and economic well-being for all in a society. Free markets are generally efficient because they allocate supply to buyers with highest willingness to pay and demand to sellers with lowest costs, maximizing total surplus.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    34 views24 pages

    Chapter 7 (Consumers, Producers, and The Efficiency of The Markets)

    Uploaded by

    Julz Julia
    The document defines key concepts in welfare economics such as consumer surplus, producer surplus, total surplus, and efficient allocation. It explains that an efficient allocation maximizes total surplus, which is the sum of consumer surplus and producer surplus. A benevolent social planner aims to maximize total surplus and economic well-being for all in a society. Free markets are generally efficient because they allocate supply to buyers with highest willingness to pay and demand to sellers with lowest costs, maximizing total surplus.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    Chapter 7

    Consumers, Producers,
    and the Efficiency of
    Markets
    RMBPanti, ADMU
    Definition

    Welfare Economics

    Study of how the allocation of resources affects economic


    well-being
    A. Consumer Surplus
    Definition

    Willingness to Pay

    The maximum amount that the buyer will pay for a good.
    Example
    Example
    Definition

    Consumer Surplus

    Consumer surplus is the area above the price and below


    the demand curve.
    Consumer Surplus
    Consumer Surplus
    Example

    Consider a linear demand curve Q = 20 – 2p.

    1. What is the consumer surplus price is p = 2


    2. What is the change in consumer surplus when price
    increases to p=3?
    B. Producer Surplus
    Definition

    Cost

    • the value of everything a seller must give up to produce a


    good
    • measure of willingness to sell
    Example
    Example
    Definition

    Producer Surplus

    Producer surplus is the area below the price and above the
    supply curve.
    Producer Surplus
    Producer Surplus
    Example

    Consider the supply function y = 4p – 20

    1. What is the producer surplus when price is p = 7


    2. What is the change in producer surplus when price
    increases to p=9?
    C. Market Efficiency
    Benevolent Social Planner

    • The benevolent social planner is an all-knowing, all-


    powerful, well-intentioned dictator.
    • The planner wants to maximize the economic well-being
    of everyone in the society.
    Definition

    Total surplus

    • Sum of producer and consumer surplus


    • Measure of economic well-being
    • Value to buyers – cost to sellers
    Definition

    Efficient Allocation

    An allocation is efficient if it maximizes consumer surplus


    Evaluating Market Equilibrium
    Evaluating Market Equilibrium

    1. Free markets allocate the supply of goods to the


    buyers who value them most highly, as measured by
    their willingness to pay
    2. Free markets allocate the demand of goods to the
    sellers who can produce them at the lowest price
    3. Free markets produce the quantity of goods that
    maximizes the sum of consumer and producer surplus.

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