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Deman Curve and Consumer Surplus
WTP
- a consumer's willingness to pay (WTP) for a good
- = he maximum price at which he/she would buy that good
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Individual consumer surplus (CS)
the net gain to an individual buyer from te purchase of a good
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Total consumer surplus
- the net gain to an individual buyer from the purchase of a good
- = difference b/w the buyer's WTP and the price paid
- Total consumer surplus: the sum of all individual CSs
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Consumer Surplus
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
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Supply curve and the Producer Surplus
a potential seller's COST of producing good
= the minimum price at which he/she is willing to sell the good
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Individual produce surplus: (PS)
- the net gain to a seller from selling a good
- = difference b/w the price received and the seller's cost
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total producer surplus
the sum of all individual producer surplus
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Producer surplus
the total producer surplus from sales of a good at a given price is the area above the supply curve but below that price
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Total Surplus = sum of TCS and TPS
Efficiency of markets
- Gains from trade in the market
- competitive markets help us to reach maximum possible total surplus at market equilibrium
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Is Higher Total Surplus Possible?
Three ways to test
- 1. reallocating consumption among consumers
- Take a g/s from a buyer with WTP higher than P* and give it to a person with WTP lower than P*
- 2. Realocating sales among sellers
- Take sales from a seller with costs lower than P* and force
- a seller with costs higher than P* to sell it
- 3. Changing the quantiy traded
- Compel buyers and sellers to trade either more or less than Q*
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Market Equilibrium Maximizes Total Surplus
- It allocates consumption of g/s to the potential buyers with the highest WTP
- It allocates sales to the potential sellers w/the lowest costs
- it ensures mutual benefits: WTPbuyer > Cseller
- if WTPbuyer < C seller, no mutually beneficial trade possible
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Key Role Players In Market Mechanism
Property Rights
give freedom of disposal of what you own
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price or the change in price
Signals buyers and sellers reservation prices and maket dis-/equilbrium
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What Makes Markets Inefficient??
- Market Failure
- Externalities
- Smart for one, dumb for all!!
- Market Control
- Price Control
- Quantiy Control
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