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Consumer Surplus, Producer
Surplus, and Market Efficiency
Consumer Surplus and the
Demand Curve
 Example is the market for used textbooks,
concentrating on the buyers.
 The example is going to show that the
demand curve is derived from people’s
tastes or preferences and these tastes
and preferences also determine how
much they gain from the opportunity to
buy used books.
Willingness to Pay
 Maximum price at which he or she
would buy a good
 Individuals won’t buy the good if it
costs more than this among but eager
to do so if it cost less
 If the price is just equal to an
individual’s willingness to pay, he or
she is indifferent between buying and
not buying
$59
45
35
25
10
5
4
3
2
1
0
D
$59
45
35
10
25
Aleisha
Brad
Claudia
Darren
Edwina
Price of
book
Quantity of books
Potential
buyers
Willingness
to pay
Aleisha
Brad
Claudia
Darren
Edwina
The Demand Curve for Used Textbooks
A consumer’s willingness
to pay for a good is the
maximum price at which
he or she would buy that
good.
Willingness to Pay
 Not a smooth curve because
it is only dealing with a small
number of consumers
 Each horizontal segment =
how much one is willing to
pay
 What is the quantity
demanded at $59?
 What is the quantity
demanded at $45?
Willingness to Pay & Consumer
Surplus
 Campus Bookstore
makes used
textbooks available
at a price of $30.
Who will buy books?
 Do they gain from
their purchase?
Consumer Surplus in the Used Textbook Market
Price = $30
Aleisha’s consumer surplus:
$59-$39=$29
Brad’s consumer surplus:
$45-$30=$15
Claudia’s consumer
surplus: $35-$30=$5
The total consumer
surplus is given by
the entire shaded
area - the sum of the
individual consumer
surpluses of Aleisha,
Brad, and Claudia -
equal to $29 + $15 +
$5 = $49.
5
4
3
2
1
0
Aleisha
Brad
Claudia
Darren
D
Edwina
$59
45
35
30
10
25
Price of book
Quantity of books
Willingness to Pay & Consumer
Surplus
 Individual Consumer Surplus – net gain that a
buyer achieves from the purchase of a good
 Whenever a buyer pays a price less than his
or her willingness to pay, the buy achieves
an individual consumer surplus
 Total Consumer Surplus – sum of the
individual consumer surpluses achieved by all
the buyers of a good
 Aleisha, Brad and Claudia: $29 +$15 +$5 =
$49
Consumer Surplus
 Refers to both individual and total
consumer surplus
 Total consumer surplus is equal to the area
below the demand curve but above the price
The total 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
Changing Prices Affects
Consumer Surplus
 Textbook Example again…..
 BUT……the bookstore has now
decided to sell used textbooks
for $20 instead of $30. How
much would this fall in price
increase consumer surplus?
Consumer Surplus and a Fall in the Price of Used Textbooks
Darren’s
consumer
surplus
Increase in Aleisha’s
consumer surplus
Increase in Brad’s
consumer surplus
Increase in Claude’s
consumer surplus
5
4
3
2
1
0
D
$59
45
35
30
10
25
20
Aleisha
Brad
Claudia
Darren
Edwina
Price of
book
Quantity of books
Original price = $30
New price = $20
Changing Prices Affects
Consumer Surplus
 The graph showed that when the
price of a good falls, the area under
the demand curve but not above the
price (which is equal to total
consumer surplus) increases
Producer Surplus and the
Supply Curve
 We have buyers of goods that would
be willing to pay more for their
purchase than the price they actually
pay
 Some sellers of a good would have
been willing to sell it for less than the
price they actually receive
Producer Surplus and the
Supply Curve
 Seller’s cost –
lowest price at
which a potential
seller is willing to
sell
 What is Andrew’s
cost? What is
Betty’s cost?
Producer Surplus and the
Supply Curve
 Since the students don’t have to manufacture
the books, does it cost the student who sells a
book anything to make that book available for
sale?
 YES!
 You won’t have it later in your personal
collection – opportunity cost!
 When saying “cost” of a good as a seller,
referring to selling that good even if you don’t
spend any money to sell the good
Producer Surplus and the
Supply Curve
 Individual Producer Surplus – the net
gain, the difference between the price he
actually gets and his cost, the minimum
price at which he would have been willing
to sell
 Total Producer Surplus – the total net
gain to all sellers in the market
 Producer Surplus – refers to either the
total or individual producer surplus
Producer Surplus in the Used Textbook Market
Betty’s
producer
surplus
Andrew’s
producer
surplus
Carlos’s
producer
surplus
Price = $30
5
4
3
2
1
0
S
$45
35
30
25
5
15
Price of book
Quantity of books
Engelbert
Donna
Carlos
Betty
Andrew
Total Producer Surplus is given by the entire shaded area,
the sum of the individual producer surpluses of Andrew,
Betty, and Carlos.
$25 + $15 + $5 = $45
The total producer surplus from sales of a good at a given price
is the area above the supply curve but below that price.
How Changing Price Affects
Producer Surplus
When the price of a good rises,
producer surplus increases through
two ways:
The gains of those who would have
supplied the good even at the
original, lower price and
The gains of those who are induced
to supply the good by the higher
price
A Rise in the Price Increases Producer Surplus
S
Increase in producer
surplus to original
sellers
Consumer surplus
gained by new
sellers
Consumer Surplus, Producer
Surplus, and the Gains from Trade
 Total Surplus generated in a market
is the total net gain to consumers
and producers from trading in the
market. It is the sum of the producer
and the consumer surplus
 This also shows there are gains from
trade
Total Surplus
S
D
Equilibrium quantity
Equilibrium
price
Producer
surplus
Consumer
surplus E
The Efficiency of Markets
 Markets are usually “efficient”
 Are they?
 It is claimed that once the market has
produced its gains from trade, there
is no way to make some people
better off without making ofther
people worse off, except…..under
well-defined conditions
The Efficiency of Markets
 A committee wants to improve on the
market equilibrium by deciding who
gets and who gives up a used
textbook. The goal of the committee
– bypass the market outcome and
come up with another arrangement
that would produce higher total
surplus
The Efficiency of Markets
 Three ways to increase the total
surplus:
1. Reallocate consumption among
consumers
2. Reallocate sales among sellers
3. Change the quantity traded
1. Reallocate consumption
among consumers
 Committee
tries to
increase
total surplus
by selling
books to
different
consumers
2. Reallocate sales among
sellers
 Committee tried to
increase total surplus by
altering who sells their
books, taking sales away
from sellers who would
have sold their books in
the market equilibrium
and instead compelling
those who would not
have sold their books in
the market equilibrium to
sell them
3. Change the quantity traded
 Committee tries to
increase total
surplus by
compelling
students to trade
either more books
or fewer books
than the market
equilibrium
quantity.
The Efficiency of Markets
 Key Idea: once this market is in
equilibrium, there is no way to
increase the gains from trade
 An efficient market performs four
important functions
The Efficiency of Markets
 An efficient market performs four
important functions
1. It allocates consumption of the good to
the potential buyers who most value it,
as indicated by the fact that they have
the highest willingness to pay
2. It allocates sales to the potential sellers
who most value the right to sell the
good, as indicated by the fact that they
have the lowest cost
The Efficiency of Markets
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 who
doesn’t make a purchase values the
good less than every potential seller who
doesn’t make a sale, so that no mutually
beneficial transaction are missed
The Efficiency of Markets
 Three caveats:
1. Market can be efficient, it isn’t
necessarily fair
2. Markets sometimes fail
3. Even when market equilibrium
maximizes total surplus, this does not
mean that it results in the best outcome
for every individual consumer and
producer
The Efficiency of Markets
 Efficiency is about how to
achieve goals, not what those
goals should be
Consumer Surplus, Producer
Surplus, and Market Efficiency
Notes
Willingness to Pay
 Individuals won’t buy the good if it
costs more than this among but eager
to do so if it cost less
 If the price is just equal to an
individual’s willingness to pay, he or
she is indifferent between buying and
not buying
$59
45
35
25
10
5
4
3
2
1
0
D
$59
45
35
10
25
Aleisha
Brad
Claudia
Darren
Edwina
Price of
book
Quantity of books
Potential
buyers
Willingness
to pay
Aleisha
Brad
Claudia
Darren
Edwina
The Demand Curve for Used Textbooks
Willingness to Pay
 What is the quantity
demanded at $59?
 What is the quantity
demanded at $45?
Willingness to Pay & Consumer
Surplus
 Campus Bookstore
makes used
textbooks available
at a price of $30.
Who will buy
books?
 Do they gain from
their purchase?
Consumer Surplus in the Used Textbook Market
Price = $30
Aleisha’s consumer surplus:
$59-$39=$29
Brad’s consumer surplus:
$45-$30=$15
Claudia’s consumer
surplus: $35-$30=$5
5
4
3
2
1
0
Aleisha
Brad
Claudia
Darren
D
Edwina
$59
45
35
30
10
25
Price of book
Quantity of books
Willingness to Pay & Consumer
Surplus
 Individual Consumer Surplus – net gain that a
buyer achieves from the purchase of a good
 Total Consumer Surplus – sum of the
individual consumer surpluses achieved by all
the buyers of a good
Consumer Surplus
 Refers to both individual and total
consumer surplus
Consumer Surplus and a Fall in the Price of Used Textbooks
Darren’s
consumer
surplus
Increase in Aleisha’s
consumer surplus
Increase in Brad’s
consumer surplus
Increase in Claude’s
consumer surplus
5
4
3
2
1
0
D
$59
45
35
30
10
25
20
Aleisha
Brad
Claudia
Darren
Edwina
Price of
book
Quantity of books
Original price = $30
New price = $20
Changing Prices Affects
Consumer Surplus
 The graph showed that when the
price of a good falls, the area under
the demand curve but not above the
price (which is equal to total
consumer surplus) increases
Producer Surplus and the
Supply Curve
 We have buyers of goods that would
be willing to pay more for their
purchase than the price they actually
pay
Producer Surplus and the
Supply Curve
 Seller’s cost –
lowest price at
which a potential
seller is willing to
sell
 What is Andrew’s
cost? What is
Betty’s cost?
Producer Surplus and the
Supply Curve
 Since the students don’t have to manufacture
the books, does it cost the student who sells a
book anything to make that book available for
sale?
 YES!
Producer Surplus and the
Supply Curve
 Individual Producer Surplus –
 Total Producer Surplus –
 Producer Surplus –
Producer Surplus in the Used Textbook Market
Betty’s
producer
surplus
Andrew’s
producer
surplus
Carlos’s
producer
surplus
Price = $30
5
4
3
2
1
0
S
$45
35
30
25
5
15
Price of book
Quantity of books
Engelbert
Donna
Carlos
Betty
Andrew
How Changing Price Affects
Producer Surplus
When the price of a good rises,
producer surplus increases through
two ways:
A Rise in the Price Increases Producer Surplus
S
Increase in producer
surplus to original
sellers
Consumer surplus
gained by new
sellers
Consumer Surplus, Producer
Surplus, and the Gains from Trade
 This also shows there are gains from
trade
Total Surplus
S
D
Equilibrium quantity
Equilibrium
price
Producer
surplus
Consumer
surplus E
The Efficiency of Markets
 Markets are usually “efficient”
 Are they?
 It is claimed that once the market has
produced its gains from trade, there
is no way to make some people
better off without making ofther
people worse off, except…..under
well-defined conditions
The Efficiency of Markets
 A committee wants to improve on the
market equilibrium by deciding who
gets and who gives up a used
textbook. The goal of the committee
– bypass the market outcome and
come up with another arrangement
that would produce higher total
surplus
The Efficiency of Markets
 Three ways to increase the total
surplus:
1. Reallocate consumption among
consumers
2. Reallocate sales among sellers
3. Change the quantity traded
1. Reallocate consumption
among consumers
 Committee
tries to
increase
total surplus
by selling
books to
different
consumers
2. Reallocate sales among
sellers
 Committee tried to
increase total surplus by
altering who sells their
books, taking sales away
from sellers who would
have sold their books in
the market equilibrium
and instead compelling
those who would not
have sold their books in
the market equilibrium to
sell them
3. Change the quantity traded
 Committee tries to
increase total
surplus by
compelling
students to trade
either more books
or fewer books
than the market
equilibrium
quantity.
The Efficiency of Markets
 Key Idea: once this market is in
equilibrium, there is no way to
increase the gains from trade
 An efficient market performs four
important functions
The Efficiency of Markets
 An efficient market performs four
important functions
1. It allocates consumption of the good to
the potential buyers who most value it,
as indicated by the fact that they have
the highest willingness to pay
2. It allocates sales to the potential sellers
who most value the right to sell the
good, as indicated by the fact that they
have the lowest cost
The Efficiency of Markets
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 who
doesn’t make a purchase values the
good less than every potential seller who
doesn’t make a sale, so that no mutually
beneficial transaction are missed
The Efficiency of Markets
 Three caveats:
1. Market can be efficient, it isn’t
necessarily fair
2. Markets sometimes fail
3. Even when market equilibrium
maximizes total surplus, this does not
mean that it results in the best outcome
for every individual consumer and
producer
The Efficiency of Markets
 Efficiency is about how to
achieve goals, not what those
goals should be

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Consumer Surplus Producer Surplus and Market.ppt

  • 1. Consumer Surplus, Producer Surplus, and Market Efficiency
  • 2. Consumer Surplus and the Demand Curve  Example is the market for used textbooks, concentrating on the buyers.  The example is going to show that the demand curve is derived from people’s tastes or preferences and these tastes and preferences also determine how much they gain from the opportunity to buy used books.
  • 3. Willingness to Pay  Maximum price at which he or she would buy a good  Individuals won’t buy the good if it costs more than this among but eager to do so if it cost less  If the price is just equal to an individual’s willingness to pay, he or she is indifferent between buying and not buying
  • 4. $59 45 35 25 10 5 4 3 2 1 0 D $59 45 35 10 25 Aleisha Brad Claudia Darren Edwina Price of book Quantity of books Potential buyers Willingness to pay Aleisha Brad Claudia Darren Edwina The Demand Curve for Used Textbooks A consumer’s willingness to pay for a good is the maximum price at which he or she would buy that good.
  • 5. Willingness to Pay  Not a smooth curve because it is only dealing with a small number of consumers  Each horizontal segment = how much one is willing to pay  What is the quantity demanded at $59?  What is the quantity demanded at $45?
  • 6. Willingness to Pay & Consumer Surplus  Campus Bookstore makes used textbooks available at a price of $30. Who will buy books?  Do they gain from their purchase?
  • 7. Consumer Surplus in the Used Textbook Market Price = $30 Aleisha’s consumer surplus: $59-$39=$29 Brad’s consumer surplus: $45-$30=$15 Claudia’s consumer surplus: $35-$30=$5 The total consumer surplus is given by the entire shaded area - the sum of the individual consumer surpluses of Aleisha, Brad, and Claudia - equal to $29 + $15 + $5 = $49. 5 4 3 2 1 0 Aleisha Brad Claudia Darren D Edwina $59 45 35 30 10 25 Price of book Quantity of books
  • 8. Willingness to Pay & Consumer Surplus  Individual Consumer Surplus – net gain that a buyer achieves from the purchase of a good  Whenever a buyer pays a price less than his or her willingness to pay, the buy achieves an individual consumer surplus  Total Consumer Surplus – sum of the individual consumer surpluses achieved by all the buyers of a good  Aleisha, Brad and Claudia: $29 +$15 +$5 = $49
  • 9. Consumer Surplus  Refers to both individual and total consumer surplus  Total consumer surplus is equal to the area below the demand curve but above the price The total 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
  • 10. Changing Prices Affects Consumer Surplus  Textbook Example again…..  BUT……the bookstore has now decided to sell used textbooks for $20 instead of $30. How much would this fall in price increase consumer surplus?
  • 11. Consumer Surplus and a Fall in the Price of Used Textbooks Darren’s consumer surplus Increase in Aleisha’s consumer surplus Increase in Brad’s consumer surplus Increase in Claude’s consumer surplus 5 4 3 2 1 0 D $59 45 35 30 10 25 20 Aleisha Brad Claudia Darren Edwina Price of book Quantity of books Original price = $30 New price = $20
  • 12. Changing Prices Affects Consumer Surplus  The graph showed that when the price of a good falls, the area under the demand curve but not above the price (which is equal to total consumer surplus) increases
  • 13. Producer Surplus and the Supply Curve  We have buyers of goods that would be willing to pay more for their purchase than the price they actually pay  Some sellers of a good would have been willing to sell it for less than the price they actually receive
  • 14. Producer Surplus and the Supply Curve  Seller’s cost – lowest price at which a potential seller is willing to sell  What is Andrew’s cost? What is Betty’s cost?
  • 15. Producer Surplus and the Supply Curve  Since the students don’t have to manufacture the books, does it cost the student who sells a book anything to make that book available for sale?  YES!  You won’t have it later in your personal collection – opportunity cost!  When saying “cost” of a good as a seller, referring to selling that good even if you don’t spend any money to sell the good
  • 16. Producer Surplus and the Supply Curve  Individual Producer Surplus – the net gain, the difference between the price he actually gets and his cost, the minimum price at which he would have been willing to sell  Total Producer Surplus – the total net gain to all sellers in the market  Producer Surplus – refers to either the total or individual producer surplus
  • 17. Producer Surplus in the Used Textbook Market Betty’s producer surplus Andrew’s producer surplus Carlos’s producer surplus Price = $30 5 4 3 2 1 0 S $45 35 30 25 5 15 Price of book Quantity of books Engelbert Donna Carlos Betty Andrew Total Producer Surplus is given by the entire shaded area, the sum of the individual producer surpluses of Andrew, Betty, and Carlos. $25 + $15 + $5 = $45 The total producer surplus from sales of a good at a given price is the area above the supply curve but below that price.
  • 18. How Changing Price Affects Producer Surplus When the price of a good rises, producer surplus increases through two ways: The gains of those who would have supplied the good even at the original, lower price and The gains of those who are induced to supply the good by the higher price
  • 19. A Rise in the Price Increases Producer Surplus S Increase in producer surplus to original sellers Consumer surplus gained by new sellers
  • 20. Consumer Surplus, Producer Surplus, and the Gains from Trade  Total Surplus generated in a market is the total net gain to consumers and producers from trading in the market. It is the sum of the producer and the consumer surplus  This also shows there are gains from trade
  • 22. The Efficiency of Markets  Markets are usually “efficient”  Are they?  It is claimed that once the market has produced its gains from trade, there is no way to make some people better off without making ofther people worse off, except…..under well-defined conditions
  • 23. The Efficiency of Markets  A committee wants to improve on the market equilibrium by deciding who gets and who gives up a used textbook. The goal of the committee – bypass the market outcome and come up with another arrangement that would produce higher total surplus
  • 24. The Efficiency of Markets  Three ways to increase the total surplus: 1. Reallocate consumption among consumers 2. Reallocate sales among sellers 3. Change the quantity traded
  • 25. 1. Reallocate consumption among consumers  Committee tries to increase total surplus by selling books to different consumers
  • 26. 2. Reallocate sales among sellers  Committee tried to increase total surplus by altering who sells their books, taking sales away from sellers who would have sold their books in the market equilibrium and instead compelling those who would not have sold their books in the market equilibrium to sell them
  • 27. 3. Change the quantity traded  Committee tries to increase total surplus by compelling students to trade either more books or fewer books than the market equilibrium quantity.
  • 28. The Efficiency of Markets  Key Idea: once this market is in equilibrium, there is no way to increase the gains from trade  An efficient market performs four important functions
  • 29. The Efficiency of Markets  An efficient market performs four important functions 1. It allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay 2. It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost
  • 30. The Efficiency of Markets 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 who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale, so that no mutually beneficial transaction are missed
  • 31. The Efficiency of Markets  Three caveats: 1. Market can be efficient, it isn’t necessarily fair 2. Markets sometimes fail 3. Even when market equilibrium maximizes total surplus, this does not mean that it results in the best outcome for every individual consumer and producer
  • 32. The Efficiency of Markets  Efficiency is about how to achieve goals, not what those goals should be
  • 33. Consumer Surplus, Producer Surplus, and Market Efficiency Notes
  • 34. Willingness to Pay  Individuals won’t buy the good if it costs more than this among but eager to do so if it cost less  If the price is just equal to an individual’s willingness to pay, he or she is indifferent between buying and not buying
  • 35. $59 45 35 25 10 5 4 3 2 1 0 D $59 45 35 10 25 Aleisha Brad Claudia Darren Edwina Price of book Quantity of books Potential buyers Willingness to pay Aleisha Brad Claudia Darren Edwina The Demand Curve for Used Textbooks
  • 36. Willingness to Pay  What is the quantity demanded at $59?  What is the quantity demanded at $45?
  • 37. Willingness to Pay & Consumer Surplus  Campus Bookstore makes used textbooks available at a price of $30. Who will buy books?  Do they gain from their purchase?
  • 38. Consumer Surplus in the Used Textbook Market Price = $30 Aleisha’s consumer surplus: $59-$39=$29 Brad’s consumer surplus: $45-$30=$15 Claudia’s consumer surplus: $35-$30=$5 5 4 3 2 1 0 Aleisha Brad Claudia Darren D Edwina $59 45 35 30 10 25 Price of book Quantity of books
  • 39. Willingness to Pay & Consumer Surplus  Individual Consumer Surplus – net gain that a buyer achieves from the purchase of a good  Total Consumer Surplus – sum of the individual consumer surpluses achieved by all the buyers of a good
  • 40. Consumer Surplus  Refers to both individual and total consumer surplus
  • 41. Consumer Surplus and a Fall in the Price of Used Textbooks Darren’s consumer surplus Increase in Aleisha’s consumer surplus Increase in Brad’s consumer surplus Increase in Claude’s consumer surplus 5 4 3 2 1 0 D $59 45 35 30 10 25 20 Aleisha Brad Claudia Darren Edwina Price of book Quantity of books Original price = $30 New price = $20
  • 42. Changing Prices Affects Consumer Surplus  The graph showed that when the price of a good falls, the area under the demand curve but not above the price (which is equal to total consumer surplus) increases
  • 43. Producer Surplus and the Supply Curve  We have buyers of goods that would be willing to pay more for their purchase than the price they actually pay
  • 44. Producer Surplus and the Supply Curve  Seller’s cost – lowest price at which a potential seller is willing to sell  What is Andrew’s cost? What is Betty’s cost?
  • 45. Producer Surplus and the Supply Curve  Since the students don’t have to manufacture the books, does it cost the student who sells a book anything to make that book available for sale?  YES!
  • 46. Producer Surplus and the Supply Curve  Individual Producer Surplus –  Total Producer Surplus –  Producer Surplus –
  • 47. Producer Surplus in the Used Textbook Market Betty’s producer surplus Andrew’s producer surplus Carlos’s producer surplus Price = $30 5 4 3 2 1 0 S $45 35 30 25 5 15 Price of book Quantity of books Engelbert Donna Carlos Betty Andrew
  • 48. How Changing Price Affects Producer Surplus When the price of a good rises, producer surplus increases through two ways:
  • 49. A Rise in the Price Increases Producer Surplus S Increase in producer surplus to original sellers Consumer surplus gained by new sellers
  • 50. Consumer Surplus, Producer Surplus, and the Gains from Trade  This also shows there are gains from trade
  • 52. The Efficiency of Markets  Markets are usually “efficient”  Are they?  It is claimed that once the market has produced its gains from trade, there is no way to make some people better off without making ofther people worse off, except…..under well-defined conditions
  • 53. The Efficiency of Markets  A committee wants to improve on the market equilibrium by deciding who gets and who gives up a used textbook. The goal of the committee – bypass the market outcome and come up with another arrangement that would produce higher total surplus
  • 54. The Efficiency of Markets  Three ways to increase the total surplus: 1. Reallocate consumption among consumers 2. Reallocate sales among sellers 3. Change the quantity traded
  • 55. 1. Reallocate consumption among consumers  Committee tries to increase total surplus by selling books to different consumers
  • 56. 2. Reallocate sales among sellers  Committee tried to increase total surplus by altering who sells their books, taking sales away from sellers who would have sold their books in the market equilibrium and instead compelling those who would not have sold their books in the market equilibrium to sell them
  • 57. 3. Change the quantity traded  Committee tries to increase total surplus by compelling students to trade either more books or fewer books than the market equilibrium quantity.
  • 58. The Efficiency of Markets  Key Idea: once this market is in equilibrium, there is no way to increase the gains from trade  An efficient market performs four important functions
  • 59. The Efficiency of Markets  An efficient market performs four important functions 1. It allocates consumption of the good to the potential buyers who most value it, as indicated by the fact that they have the highest willingness to pay 2. It allocates sales to the potential sellers who most value the right to sell the good, as indicated by the fact that they have the lowest cost
  • 60. The Efficiency of Markets 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 who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale, so that no mutually beneficial transaction are missed
  • 61. The Efficiency of Markets  Three caveats: 1. Market can be efficient, it isn’t necessarily fair 2. Markets sometimes fail 3. Even when market equilibrium maximizes total surplus, this does not mean that it results in the best outcome for every individual consumer and producer
  • 62. The Efficiency of Markets  Efficiency is about how to achieve goals, not what those goals should be