Consumer, Producer Surplus SFLS

Consumer and Producer Surplus

Welfare Economics

Marginal Analysis

We will look at two concepts in this powerpoint:

Examination of the additional benefits of an activity compared to the additional costs of that activity.

The use of Consumer and Producer surplus to see how the allocation of resources affects economic well-being. 资源的分配如何影响经济福祉

Welfare Economics

Marginal Analysis




This one first

1.) Resources are Scarce.

2.) Trade - Offs3.) Opportunity Costs4.) Marginal Thinking.5.) Rational Thinking

6.) Specialization

- there is not enough stuff for everyone.

- 鱼与熊掌不可兼得- What you must give up when you make a decision

- 最后的东西之一- 合理的

- Productivity and the Division of Labor

Basic ideas of Economics

And is one of the most basic and important

principles for the whole class.

How are prices determined?Short answer:

Market EQ

How are prices determined?Short answer:

On the Margins

深度分析 answer:

Market EQ

Coffee and Sugar pics of me

How is the price of coffee determined?

This is the question we answered before.

Coffee and Sugar pics of me

What is the value of it?

Now a slightly different question…

What is the value of it?

And not always an easy one.

Example:The Diamond / Water paradox 佯谬Why is something like water that is needed everyday to survive so cheap when diamonds are so expensive.

This puzzled economists for hundreds of years until it took a new revolution in thinking with marginal analysis to figure this out and can be explained with consumer surplus

Welfare Economics and Marginal Analysis

Another example:Buying a car

This is something that is typically bargained 讨价还价 for, not everyone pays the same price.

If you negotiate well you may buy a car for less then you otherwise would be willing to pay for it at the same time, the seller is trying to sell it to you for the highest possible price.

Welfare Economics and Marginal Analysis

Means an additional one, the measurement from one unit to the next. 最后的东西之一

Marginal Benefits VS. Marginal Costs 边际效益针对边际成本 (MB) (MC)

If MB > MC = It is worth doing 这是值得的If MB = MC = It may be worth doing “a wash” 收支平衡If MB < MC = Not worth doing 这是不值得的

Also called Cost/Benefit analysis

Marginal ThinkingThis is probably the most useful and important slide

in the whole class!





Marginal Thinking

– Training your brain to understand value训练你的大脑明白什么意思值

Supply and Marginal Cost- Sellers distinguish 区别 between cost and price.- Cost is what the seller gives up to

produce the good.- Price is what the seller gets when

the good is sold.

- The cost of producing one more unit of a good or service is its marginal cost.

Marginal Cost

Marginal Thinking


Marginal Benefit

Marginal Thinking

The value of one more unit of a good or service is its marginal benefit. can be measured as the

maximum price that people are willing to pay for another unit of the good or service.

Demand and Marginal Benefit

- Buyers distinguish 区别 between value and price.- Value is what the buyer gets.- Price is what the buyer pays.

Ex: Marginal AnalysisCans of soda

Total Utility (U)

Marginal Utility (MU)

Total Cost (TC)

Marginal Cost (MC)

0 0 01 5 12 8 23 10 34 11 45 11 56 4 6

The word “Utility” = Happiness (value)

Question is how many

cans of soda to drink?

Ex: Marginal AnalysisCans of soda

Total Utility (U)


Total Cost (TC)

Marginal Cost (MC)

0 0 01 5 12 8 23 10 34 11 45 11 56 4 6

The word “Utility” = Happiness (value)

Question is how many

cans of soda to drink?

If MB > MC = keep going!If MB = MC = Perfect amount! If MB < MC = too much!

Cans of Soda

Total Utility (U)


Total Cost (TC)

Marginal Cost (MC)

0 0 -- 0 --1 5 5 1 12 8 3 2 13 10 2 3 14 11 1 4 15 11 0 5 16 4 -7 6 1

Ex: Marginal Analysis

The word “Utility” = Happiness

Find the MB and the MC of

each can of soda.


Cans of Soda

Total Utility (U)


Total Cost (TC)

Marginal Cost (MC)

0 0 -- 0 --1 5 5 1 12 8 3 2 13 10 2 3 14 11 1 4 15 11 0 5 16 4 -7 6 1

Ex: Marginal Analysis

The word “Utility” = Happiness

4 cans is the best amount!


Welfare Economics

Marginal Analysis




Efficiency - An allocation of resources is efficient if it maximizes total surplus.

Efficiency means:- The goods are consumed by the buyers who value them most highly. - The goods are produced by the producers with the lowest costs.- Raising or lowering the quantity of a good artificially would not increase total surplus.

Total Surplus = (value to buyers) – (cost to sellers)

Welfare Economics

Market EQ: P = 30 Q = 15Total surplus = CS + PS

Is the market EQ efficient?

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

CS

PS

D

S

Evaluating the Market Equilibrium (EQ)

So this is the goal to

understand.

Consumer Surplus (CS)

Textbook Definition The marginal benefit from a good or service minus

the price paid for it, summed over the quantity consumed.

Easy Definition The amount a buyer is willing to pay for a good

minus the amount the buyer actually pays for it.

Easiest Definition CS = WTP –

P

Welfare Economics

- Often we have things that mean a great deal to us we say they are of sentimental value. 情感价值 - Maybe no amount of money might be able to replace the object concerned.


CS = WTP – P

-In everyday life, however, we also place different values on the things that we own. Consumer surplus aims to assess 评估 the value of these items. This is a very important concept in economic decision making.

Willingness to Pay (WTP)

- A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good.WTP measures how much the buyer values the good.

name WTP

Peter 5250

Clara 4500

Wilson 3750

Key 3000

Example: 4 buyers’ WTP for an iPad

Welfare Economics

Question:If price of an iPad is 4500, who will buy an iPad, and what

is the quantity demanded?

Answer:Peter & Clara will buy an iPod,

Wilson & Key will not. Hence, Qd = 2 when P = 4500.

name WTP

Peter 5250

Clara 4500

Wilson 3750

Key 3000

WTP and the Demand Curve

Derive 派生the demand schedule:

4Peter, Clara, Wilson, Key 0 – 3000

3Peter, Clara, Wilson

3001 – 3750

2Peter, Clara3751 – 4500

1Peter4501 – 5250

0nobody5251 & up

Qdwho buysP (price of iPad)

name WTP

Peter 5250

Clara 4500

Wilson 3750

Key 3000


P Qd

6000 & up 0

4501 – 5250 1

3751 – 4500 2

3000 – 3750 3

0 – 3000 4

P

Q


About the Staircase Shape…This D curve looks like a staircase with 4 steps – one per buyer. If there were a huge # of buyers, as in a competitive market,there would be a huge # of very tiny steps,and it would look more like a smooth curve.

P

Q

If we looked at a larger market with many more buyers, each would be a step on this curve

It looks just like a demand curve doesn’t itThat’s because it is!

D = MB

P

Q

Demand = Marginal Benefit

About the Staircase Shape…

At any Q, the height of the D curve is the WTP of the marginal buyer, the buyer who would leave the market if P were any higher.

Peters’s WTP

Clara’s WTP

Wilson’s WTP

Key’s WTP

P

Q


is the amount a buyer is willing to pay minus the amount the buyer actually pays:

name WTP

Peter 5250

Clara 4500

Wilson 3750

Key 3000

Suppose P = 4600.Only Peter will buy it Peter’s CS = 5250 – 4600 = 650.The others get no CS because they do not buy an iPad at this price. Total CS = 650.


CS = WTP – P

Example:

P

Q

Peter’s WTP

P = 4600 Peter’s CS = 5250 – 4600 = 650Total CS = 650

CS and the Demand Curve

P

Q34

Peter’s WTP

Clara’s WTP

Instead, suppose P = 3800 Peter’s CS = 5250 – 3800 = 1450Clara’s CS =4500 – 3800 = 700Total CS = 2150


P

Q35

The lesson:Total CS equals the area under

the demand curve above the price, from 0 to

Q.


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

The demand for shoes

D

Number of buyers

Price per KG

At Q = 5, the marginal buyer is willing to pay 50 for a Kg of tea. Suppose P = 30. Then his consumer surplus = 20.


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q


D

CS is the area b/w P and the D curve, from 0 to Q.


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

QD

If P rises to 40, CS fallsTwo reasons for the fall in CS.

1. Fall in CS due to buyers leaving market

2. Fall in CS due to remaining buyers

paying higher P

Higher Prices Reduce CS

Now for the Producer’s side

It’s basically the same thing for the other guys too, just a little different vocabulary so I will go though it faster

Producer Surplus (PS)


the cost to produce it, summed over the quantity sold.

Easy Definition The amount a seller is willing to sell a good minus

the amount the buyer actually pays for it.

Easiest Definition PS = WTS –

P

Welfare Economics

name cost

Tom 10

Jim 20

Andy 35

A seller will produce and sell the good/service only if the price exceeds his or her cost.

Hence, cost is a measure of Willingness to Sell.

- is the value of everything a seller must give up to produce a good (i.e., opportunity cost).

- Includes cost of all resources used to produce good, including value of the seller’s time.

Welfare EconomicsCost

Example: Costs of 3 sellers in the tea selling business.

335 & up

220 – 34

110 – 19

00 – 9

QsPDerive 派生 the supply schedule from the cost data:

name cost

Tom 10

Jim 20

Andy 35

Cost and the Supply Curve

$0

$10

$20

$30

$40

0 1 2 3

P

Q

P Qs

0 – 9 010 –

19 1

20 – 34 2

35 & up 3

name cost

Tom 10

Jim 20

Andy 35


$0

$10

$20

$30

$40

0 1 2 3

P

Q

At each Q, the height of the S curve is the cost of the marginal seller, the seller who would leave the market if the price were any lower.

Andy’s cost

Jim’s cost

Tom’s cost


$0

$10

$20

$30

$40

0 1 2 3

P

Q

Producer surplus (PS): the amount a seller is paid for a good minus the seller’s cost

PS = P – cost


$0

$10

$20

$30

$40

0 1 2 3

P

Q

PS = P – cost

Suppose P = 25.

Tom’s PS = 15

Jim’s PS = 5

Andy’s PS = 0

Total PS = 20

Jim’s cost

Toms costTotal PS equals the

area above the supply curve under the price,

from 0 to Q.

Andy’s cost

Producer Surplus (PS) and the Supply Curve

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

Number of buyers

Price per KG

Suppose P = 40. At Q = 15, the marginal seller’s cost is 30, and her producer surplus is 10.


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

The supply of shoes

SPS is the area b/w P and the S curve, from 0 to Q.


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

If P falls to 30,PS falls

Two reasons for the fall in PS.

S

1. Fall in PS due to sellers leaving market

2. Fall in PS due to remaining sellersgetting lower P

Lower Prices Reduces (PS)

CS = (value to buyers) – (amount paid by buyers)= buyers’ gains from participating in the market

PS = (amount received by sellers) – (cost to sellers)= sellers’ gains from participating in the market

Total surplus = CS + PS= (value to buyers) – (cost to sellers)= total gains from trade in a market

(PS) (CS) and Total Surplus

Market EQ: P = 30 Q = 15Total surplus = CS + PS

Is the market EQ efficient?

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

CS

PS

D

S

Evaluating the Market Equilibrium (EQ)

So yes! This is as good as it

gets!

Which Buyers Consume the Good?

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

Every buyer whose WTP is ≥ 30 will buy.

D


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

Every buyer whose WTP is < 30 will not.

D


0

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20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

Every buyer whose WTP is ≥ 30 will buy. Every buyer whose WTP is < 30 will not. So…

D

the buyers who value the good most highly are the ones who consume it.

Which Sellers Produce the Good?

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

Every seller whose cost is ≤ 30 will produce the good. S


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

Every seller whose cost is > 30 will not.

S


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

Every seller whose cost is ≤ 30 will produce the good. Every seller whose cost is > 30 will not. So…

S

the sellers with the lowest cost produce the good.

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

At Q = 10, cost of producing the marginal unit is 25 value to consumers of the marginal unit is 40Hence, can increase total surplus by increasing Q. This is true at any Q less than 15.

Does EQ Maximize Total Surplus?

S

D


0

10

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30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

At Q = 20, cost of producing the marginal unit is 35 value to consumers of the marginal unit is only 20Hence, can increase total surplus by reducing Q. This is true at any Q greater than 15.

S

D

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

CS

PS

D

SThe market EQ quantity maximizes

total surplus:At any other quantity, can increase total surplus by moving toward the market EQ quantity.


“Free” Market Equilibrium (EQ) is the most efficient way to produce the things that society needs, wants, and thinks it wants. End of story.

And the answer on any test about it

Positive economics is the study of what is

结果是基于数据 Normative economics

is the study of what should be 是基于你的愿望是什么结果

So to Summarize…

Welfare Economics

Marginal Analysis








Marginal Thinking


Marginal Benefit

Marginal Thinking

The value of one more unit of a good or service is its marginal benefit. can be measured as the

maximum price that people are willing to pay for another unit of the good or service.

Demand and Marginal Benefit

- Buyers distinguish 区别 between value and price.- Value is what the buyer gets.- Price is what the buyer pays.


Supply and Marginal Cost- Sellers distinguish 区别 between cost and price.- Cost is what the seller gives up to

produce the good.- Price is what the seller gets when

the good is sold.

- The cost of producing one more unit of a good or service is its marginal cost.

Marginal Cost

Marginal Thinking

If we looked at a larger market with many more buyers, each would be a step on this curve

It looks just like a demand curve doesn’t itThat’s because it is!

D = MB

P

Q

Demand = Marginal Benefit

About the Staircase Shape…



the price paid for it, summed over the quantity consumed.

Easy Definition The amount a buyer is willing to pay for a good

minus the amount the buyer actually pays for it.

Easiest Definition CS = WTP –

P

Welfare Economics

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q


D

CS is the area b/w P and the D curve, from 0 to Q.




the cost to produce it, summed over the quantity sold.

Easy Definition The amount a seller is willing to sell a good minus

the amount the buyer actually pays for it.

Easiest Definition PS = WTS –

P

Welfare Economics

0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

The supply of shoes

SPS is the area b/w P and the S curve, from 0 to Q.


0

10

20

30

40

50

60

0 5 10 15 20 25 30

P

Q

S

D

CS

PS

D

SThe market EQ quantity maximizes

total surplus:At any other quantity, can increase total surplus by moving toward the market EQ quantity.


However....

This system is really good but isn’t always

equal and fair to everyone…

Some people do very well in

this system.

And some are more unlucky.

As well as some other unintended problems…

But is there a better system?

The short answer is no, Humans haven’t figured

out a better system this this so

far.

The EndThank You

Education

Consumer, Producer Surplus SFLS