Professional Documents
Culture Documents
Producers, and
the Efficiency of
Markets
Producer
Producer surplus
surplus measures
measures economic
economic
welfare
welfare from
from the
the sellers
sellers side.
side.
CONSUMER SURPLUS
Willingness
Willingness to
to pay
pay is
is the
the maximum
maximum
amount
amount that
that aa buyer
buyer will
will pay
pay for
for aa good.
good.
ItIt measures
measures how
how much
much the
the buyer
buyer values
values
the
the good
good or
or service.
service.
Consumer
Consumer surplus
surplus is
is the
the buyers
buyers
willingness
willingness to
to pay
pay for
for aa good
good minus
minus the
the
amount
amount the
the buyer
buyer actually
actually pays
pays for
for it.
it.
CONSUMER SURPLUS
The
The market
market demand
demand curve
curve depicts
depicts the
the
various
various quantities
quantities that
that buyers
buyers would
would be
be
willing
willing and
and able
able to
to purchase
purchase at
at different
different
prices.
prices.
Buyers
Quantity
Demanded
None
$80 to $100
John
$70 to $80
John, Paul
$50 to $70
$50 or less
$100
$80
$70
$50
Demand
Quantity
of Albums
Price of
Album
$100
Johns consumer surplus ($20)
$100
Johns consumer surplus ($30)
$80
$80
$70
$70
$50
$50
Total consumer
surplus ($40)
Demand
Demand
Quantity
of Albums
Quantity
of Albums
Price
Price
P1
P1
C
Demand
B
F
P2
Additional
consumer
surplus to initial
consumers
Q1
Quantity
Q1
Q2
Quantity
PRODUCER SURPLUS
Producer
Producer surplus
surplus is
is the
the amount
amount aa
seller
seller is
is paid
paid for
for aa good
good minus
minus the
the
sellers
sellers cost.
cost.
ItIt measures
measures the
the benefit
benefit to
to sellers
sellers
participating
participating in
in aa market.
market.
Sellers
Quantity
Supplied
$900 or more
$800 to $900
$600 to $800
Georgia, Grandma
$500 to $600
Grandma
None
Supply
Marys
cost
$900
$800
Fridas cost
Georgias cost
$600
$500
Grandma cost
Supply
Price of
House
Painting
Supply
Total producer
surplus ($500)
$900
$900
$800
$800
$600
$600
$500
$500
Georgias producer surplus ($200)
Grandpas producer
surplus ($100)
4
Quantity of
Houses Painted
Grandpas producer
surplus ($300)
4
Quantity of
Houses Painted
Price
Price
Supply
Supply
Additional
producer surplus
to initial
producers
D
P2
B
P1
P1
C
Producer surplus
for new producers
Initial
producer
surplus
Producer
surplus
A
0
Q1
Quantity
Q1
Q2
Quantity
MARKET EFFICIENCY
Consumer
Consumer surplus
surplus and
and producer
producer surplus
surplus
may
may be
be used
used to
to address
address the
the following
following
question:
question:
Is
Is the
the allocation
allocation of
of resources
resources
determined
determined by
by free
free markets
markets in
in any
any way
way
desirable?
desirable?
MARKET EFFICIENCY
Consumer
Consumer Surplus
Surplus
== Value
Value to
to buyers
buyers Amount
Amount paid
paid by
by buyers
buyers
and
and
Producer
Producer Surplus
Surplus
== Amount
Amount received
received by
by sellers
sellers Cost
Cost to
to
sellers
sellers
MARKET EFFICIENCY
Total
Total surplus
surplus
== Consumer
Consumer surplus
surplus ++ Producer
Producer surplus
surplus
or
or
Total
Total surplus
surplus
== Value
Value to
to buyers
buyers Cost
Cost to
to sellers
sellers
MARKET EFFICIENCY
Efficiency
Efficiency is
is the
the property
property of
of aa resource
resource
allocation
allocation of
of maximizing
maximizing the
the total
total surplus
surplus
received
received by
by all
all members
members of
of society.
society.
In
In addition
addition to
to market
market efficiency,
efficiency,aa social
social
planner
planner might
might also
also care
care about
about equity
equity the
the
fairness
fairness of
of the
the distribution
distribution of
of well-being
well-being
among
among the
the various
various buyers
buyers and
and sellers.
sellers.
Supply
Consumer surplus
Equilibrium
price
Producer surplus
B
C
0
Equilibrium
quantity
Demand
Quantity
MARKET EFFICIENCY
Three
Three Insights
Insights Concerning
Concerning Market
Market
Outcomes
Outcomes
Free
Freemarkets
marketsallocate
allocatethe
thesupply
supplyof
of goods
goodsto
to
the
thebuyers
buyerswho
whovalue
valuethem
themmost
mosthighly,
highly,as
as
measured
measuredby
bytheir
their willingness
willingnessto
topay.
pay.
Free
Freemarkets
marketsallocate
allocatethe
thedemand
demandfor
forgoods
goodsto
to
the
thesellers
sellerswho
whocan
canproduce
producethem
themat
atleast
least
cost.
cost.
Free
Freemarkets
marketsproduce
produce the
thequantity
quantityof
ofgoods
goods
that
thatmaximizes
maximizesthe
thesum
sumof
ofconsumer
consumerand
and
producer
producersurplus.
surplus.
Supply
Value to
buyers
Cost to
sellers
Cost to
sellers
Value to
buyers
Equilibrium
quantity
Demand
Quantity
Summary
Consumer
Consumer surplus
surplus equals
equals buyers
buyers
willingness
willingness to
to pay
pay for
for aa good
good minus
minus the
the
amount
amount they
they actually
actually pay
pay for
for it.
it.
Consumer
Consumer surplus
surplus measures
measures the
the benefit
benefit
buyers
buyers get
get from
from participating
participating in
in aa market.
market.
Consumer
Consumer surplus
surplus can
can be
be computed
computed by
by
finding
finding the
the area
area below
below the
the demand
demand curve
curve
and
and above
above the
the price.
price.
Summary
Producer
Producer surplus
surplus equals
equals the
the amount
amount
sellers
sellers receive
receive for
for their
their goods
goods minus
minus their
their
costs
costs of
of production.
production.
Producer
Producer surplus
surplus measures
measures the
the benefit
benefit
sellers
sellers get
get from
from participating
participating in
in aa market.
market.
Producer
Producer surplus
surplus can
can be
be computed
computed by
by
finding
finding the
the area
area below
below the
the price
price and
and above
above
the
the supply
supply curve.
curve.
Summary
An
An allocation
allocation of
of resources
resources that
that maximizes
maximizes
the
the sum
sum of
of consumer
consumer and
and producer
producer
surplus
surplus is
is said
said to
to be
be efficient.
efficient.
Policymakers
Policymakers are
are often
often concerned
concerned with
with the
the
efficiency,
efficiency,as
as well
well as
as the
the equity,
equity,of
of
economic
economic outcomes.
outcomes.
Summary
The
The equilibrium
equilibrium of
of demand
demand and
and supply
supply
maximizes
maximizes the
the sum
sum of
of consumer
consumer and
and
producer
producer surplus.
surplus.
This
This is
is as
as ifif the
the invisible
invisible hand
hand of
of the
the
marketplace
marketplace leads
leads buyers
buyers and
and sellers
sellers to
to
allocate
allocate resources
resources efficiently.
efficiently.
Markets
Markets do
do not
not allocate
allocate resources
resources
efficiently
efficiently in
in the
the presence
presence of
of market
market
failures.
failures.
The End