Class 1b
Welfare Economics <ul><li>•  Welfare economics is the study of how the allocation of resources affects economic well-being...
Market equilibrium <ul><li>•  In the absence of market failures, the market in equilibrium maximises the total welfare in ...
Consumer and Producer Surplus <ul><li>•  Consumer surplus measures economic welfare from the buyer side. </li></ul><ul><li...
Consumer surplus <ul><li>•  Willingness to pay is the maximum price that a buyer is willing and able to pay for a good. </...
Consumer surplus <ul><li>•  Regardless of what the consumers’ WTP might be, they only have to pay P. </li></ul><ul><li>•  ...
Willingness to pay
Measuring consumer surplus with the demand curve
Measuring consumer surplus with the demand curve
Measuring consumer surplus with the demand curve
Consumer surplus and price <ul><li>Consumer surplus is the area below the demand curve and above the market price. </li></...
How the price affects consumer surplus
How the price affects consumer surplus
Producer surplus <ul><li>•  Regardless of what price producers would be willing to sell at, they receive P on all units. <...
Producer surplus <ul><li>•  Producer surplus is the amount a seller is paid minus the cost of production. </li></ul><ul><l...
Cost of production
Measuring producer surplus with the supply curve
Measuring producer surplus with the supply curve
Measuring producer surplus with the supply curve
Producer surplus and price <ul><li>•  Producer surplus is the area below the market price and above the supply (marginal c...
How price affects producer surplus
How price affects producer surplus
Market efficiency <ul><li>Where there is both perfect competition and no externalities, the economic wellbeing of a societ...
Economic well-being and total surplus
Economic well-being and total surplus
Consumer and producer surplus in the market equilibrium
Market efficiency: four observations <ul><li>•  Free markets allocate the supply of goods to the buyers who value them mos...
Market efficiency: the invisible hand <ul><li>•  In a free market system, the many buyers and sellers are motivated by sel...
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Class 1b

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Class 1b

  1. 1. Class 1b
  2. 2. Welfare Economics <ul><li>• Welfare economics is the study of how the allocation of resources affects economic well-being. </li></ul><ul><li>• Buyers and sellers receive benefits from </li></ul><ul><li>taking part in the market. </li></ul><ul><li>• The equilibrium in a competitive market </li></ul><ul><li>maximises the gains from trade of buyers </li></ul><ul><li>and sellers. </li></ul>
  3. 3. Market equilibrium <ul><li>• In the absence of market failures, the market in equilibrium maximises the total welfare in the economy. </li></ul><ul><li>• Departure from the equilibrium will unambiguously reduce welfare. </li></ul>
  4. 4. Consumer and Producer Surplus <ul><li>• Consumer surplus measures economic welfare from the buyer side. </li></ul><ul><li>• Producer surplus measures economic welfare from the seller side. </li></ul><ul><li>• Total welfare sums all the welfare accrued. </li></ul>
  5. 5. Consumer surplus <ul><li>• Willingness to pay is the maximum price that a buyer is willing and able to pay for a good. </li></ul><ul><li>• It measures how much the buyer values the good or service. </li></ul><ul><li>• Recall: the demand curve </li></ul>
  6. 6. Consumer surplus <ul><li>• Regardless of what the consumers’ WTP might be, they only have to pay P. </li></ul><ul><li>• Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. </li></ul>
  7. 7. Willingness to pay
  8. 8. Measuring consumer surplus with the demand curve
  9. 9. Measuring consumer surplus with the demand curve
  10. 10. Measuring consumer surplus with the demand curve
  11. 11. Consumer surplus and price <ul><li>Consumer surplus is the area below the demand curve and above the market price. </li></ul><ul><li>– A lower market price will increase consumer surplus. </li></ul><ul><li>– A higher market price will reduce consumer surplus. </li></ul>
  12. 12. How the price affects consumer surplus
  13. 13. How the price affects consumer surplus
  14. 14. Producer surplus <ul><li>• Regardless of what price producers would be willing to sell at, they receive P on all units. </li></ul><ul><li>• Producer surplus is the amount a seller receives less the cost of producing that unit. </li></ul>
  15. 15. Producer surplus <ul><li>• Producer surplus is the amount a seller is paid minus the cost of production. </li></ul><ul><li>• It measures the benefit to sellers of participating in a market. </li></ul>
  16. 16. Cost of production
  17. 17. Measuring producer surplus with the supply curve
  18. 18. Measuring producer surplus with the supply curve
  19. 19. Measuring producer surplus with the supply curve
  20. 20. Producer surplus and price <ul><li>• Producer surplus is the area below the market price and above the supply (marginal cost) curve. </li></ul><ul><li>– A lower market price will decrease producer surplus. </li></ul><ul><li>– A higher market price will increase producer surplus. </li></ul>
  21. 21. How price affects producer surplus
  22. 22. How price affects producer surplus
  23. 23. Market efficiency <ul><li>Where there is both perfect competition and no externalities, the economic wellbeing of a society is measured as the sum of consumer surplus and producer surplus. </li></ul><ul><li>• Market efficiency is attained when the allocation of resources maximises total surplus. </li></ul>
  24. 24. Economic well-being and total surplus
  25. 25. Economic well-being and total surplus
  26. 26. Consumer and producer surplus in the market equilibrium
  27. 27. Market efficiency: four observations <ul><li>• Free markets allocate the supply of goods to the buyers who value them most highly. </li></ul><ul><li>• Free markets allocate the demand for goods to the sellers who can produce them at least cost. </li></ul><ul><li>• Free markets produce the quantity of goods that maximises the sum of consumer and producer surplus. </li></ul><ul><li>• Maximising the sum of CS and PS is NOT the </li></ul><ul><li>same as maximising CS and maximising PS. </li></ul>
  28. 28. Market efficiency: the invisible hand <ul><li>• In a free market system, the many buyers and sellers are motivated by self-interest. </li></ul><ul><li>– A process of coordination and communication takes place so that buyers and sellers are directed to the most efficient outcome. </li></ul><ul><li>As if aided by an invisible hand, the free </li></ul><ul><li>market system reaches efficiency. </li></ul>

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