Principles of Microeconomics 09 Welfare and Market Efficiency
![Principles of Microeconomics 09. Welfare and Market Efficiency* Juan Pablo Chauvin August 4, 2011 Principles of Microeconomics 09. Welfare and Market Efficiency* Juan Pablo Chauvin August 4, 2011](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-1.jpg)
![Contents 1. Review of previous lecture 2. An auction 3. Prices and consumer surplus Contents 1. Review of previous lecture 2. An auction 3. Prices and consumer surplus](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-2.jpg)
![1. Review 1. Review](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-3.jpg)
![Taxes 1. • • 2. • 3. • • What shifts? If imposed on Taxes 1. • • 2. • 3. • • What shifts? If imposed on](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-4.jpg)
![Willingness to pay and CS P Flea’s WTP • Anthony’s WTP Willingness to Pay Willingness to pay and CS P Flea’s WTP • Anthony’s WTP Willingness to Pay](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-5.jpg)
![Costs and PS P • Chrissy’s cost • At any Q, the height of Costs and PS P • Chrissy’s cost • At any Q, the height of](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-6.jpg)
![2. An auction 2. An auction](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-7.jpg)
![Product: Hand-made picture frames Product: Hand-made picture frames](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-8.jpg)
![Rules • There is 6 buyers and 7 sellers in this classroom • Buyers’ Rules • There is 6 buyers and 7 sellers in this classroom • Buyers’](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-9.jpg)
![The Buyers’ WTP and the Demand Schedule Buyer Rosalia Seeye Mehnaz Rachel Monica Ellen The Buyers’ WTP and the Demand Schedule Buyer Rosalia Seeye Mehnaz Rachel Monica Ellen](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-10.jpg)
![Demand Schedule and Demand Curve P Price $ 20. 01 and up 18. 01 Demand Schedule and Demand Curve P Price $ 20. 01 and up 18. 01](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-11.jpg)
![The Sellers’ costs and the Supply Schedule Price Seller Kirk Golib Rebeca Chandrika Elisa The Sellers’ costs and the Supply Schedule Price Seller Kirk Golib Rebeca Chandrika Elisa](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-12.jpg)
![Supply Schedule and Supply Curve P S Price $ 0 – 5. 99 6 Supply Schedule and Supply Curve P S Price $ 0 – 5. 99 6](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-13.jpg)
![Equilibrium P Equilibrium Q = 4 picture frames S Equilibrium price range = from Equilibrium P Equilibrium Q = 4 picture frames S Equilibrium price range = from](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-14.jpg)
![3. Prices and Consumer Surplus 3. Prices and Consumer Surplus](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-15.jpg)
![Student’s Turn: What is the CS at Price $13? P S P* D Q* Student’s Turn: What is the CS at Price $13? P S P* D Q*](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-16.jpg)
![The CS at Price $13 P S Rosalia: 20 - 13 = 7 Seeye: The CS at Price $13 P S Rosalia: 20 - 13 = 7 Seeye:](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-17.jpg)
![CS with Lots of Buyers & a Smooth D Curve Price per pair At CS with Lots of Buyers & a Smooth D Curve Price per pair At](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-18.jpg)
![Calculating CS with a Smooth D Curve CS is the area between P and Calculating CS with a Smooth D Curve CS is the area between P and](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-19.jpg)
![How a higher price reduces CS in our example… P S In the Price How a higher price reduces CS in our example… P S In the Price](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-20.jpg)
![How a Higher Price Reduces CS in a smooth Demand Curve If P rises How a Higher Price Reduces CS in a smooth Demand Curve If P rises](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-21.jpg)
![STUDENTS’ TURN: Consumer surplus A. Find marginal buyer’s WTP at Q = 10. B. STUDENTS’ TURN: Consumer surplus A. Find marginal buyer’s WTP at Q = 10. B.](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-22.jpg)
![Answers P demand curve $ A. At Q = 10, marginal buyer’s WTP is Answers P demand curve $ A. At Q = 10, marginal buyer’s WTP is](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-23.jpg)
![Principles of Microeconomics 09. Market Efficiency and Welfare* Juan Pablo Chauvin August 4, 2011 Principles of Microeconomics 09. Market Efficiency and Welfare* Juan Pablo Chauvin August 4, 2011](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-24.jpg)
- Slides: 24
![Principles of Microeconomics 09 Welfare and Market Efficiency Juan Pablo Chauvin August 4 2011 Principles of Microeconomics 09. Welfare and Market Efficiency* Juan Pablo Chauvin August 4, 2011](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-1.jpg)
Principles of Microeconomics 09. Welfare and Market Efficiency* Juan Pablo Chauvin August 4, 2011 * Slide content principally sourced from N. Gregory Mankiw “Principles of Economics” Premium Powe. Point
![Contents 1 Review of previous lecture 2 An auction 3 Prices and consumer surplus Contents 1. Review of previous lecture 2. An auction 3. Prices and consumer surplus](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-2.jpg)
Contents 1. Review of previous lecture 2. An auction 3. Prices and consumer surplus
![1 Review 1. Review](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-3.jpg)
1. Review
![Taxes 1 2 3 What shifts If imposed on Taxes 1. • • 2. • 3. • • What shifts? If imposed on](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-4.jpg)
Taxes 1. • • 2. • 3. • • What shifts? If imposed on buyers, it is equivalent to a decrease in income, shifts the demand curve left If imposed on sellers, it is equivalent to an increase in input costs, shifts the supply curve left What is the size of the shift? The amount of the tax Tax incidence (who pays for the tax burden) Whether the tax is charged to the producers or to the sellers is irrelevant – the tax incidence is the same in both cases What matters is the elasticity of Supply and Demand • If Supply is more inelastic, the larger share of the burden falls on the sellers. • If Demand is more inelastic, the larger share of the burden falls on the buyers
![Willingness to pay and CS P Fleas WTP Anthonys WTP Willingness to Pay Willingness to pay and CS P Flea’s WTP • Anthony’s WTP Willingness to Pay](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-5.jpg)
Willingness to pay and CS P Flea’s WTP • Anthony’s WTP Willingness to Pay (WTP): the maximum price a buyer is willing to pay for a given good. • At any Q, the height of the Demand Curve is the WTP of the marginal buyer. • Consumer Surplus (CS): is the amount a buyer is willing to pay minus the amount the buyer actually pays. • To get the market CS you add-up the individual CS.
![Costs and PS P Chrissys cost At any Q the height of Costs and PS P • Chrissy’s cost • At any Q, the height of](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-6.jpg)
Costs and PS P • Chrissy’s cost • At any Q, the height of the Supply Curve is the cost of the marginal seller. Janet’s cost • Jack’s cost Q Cost is the value of everything a seller must give up to produce a good (i. e. , opportunity cost). Producer Surplus (PS): is the amount a seller is paid for a good minus the seller’s cost • To get the market PS you add-up the individual PS.
![2 An auction 2. An auction](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-7.jpg)
2. An auction
![Product Handmade picture frames Product: Hand-made picture frames](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-8.jpg)
Product: Hand-made picture frames
![Rules There is 6 buyers and 7 sellers in this classroom Buyers Rules • There is 6 buyers and 7 sellers in this classroom • Buyers’](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-9.jpg)
Rules • There is 6 buyers and 7 sellers in this classroom • Buyers’ goal is to get as many picture frames as they can • Sellers’ goal is to sell as many picture frames as they can • The instructor will serve as the auctioneer • Each buyer at a time makes an offer price (e. g. “I pay $ XX per picture frame”). • The sellers that wish to sell at that price make it known and close the transaction. • The auction may have up to 6 rounds.
![The Buyers WTP and the Demand Schedule Buyer Rosalia Seeye Mehnaz Rachel Monica Ellen The Buyers’ WTP and the Demand Schedule Buyer Rosalia Seeye Mehnaz Rachel Monica Ellen](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-10.jpg)
The Buyers’ WTP and the Demand Schedule Buyer Rosalia Seeye Mehnaz Rachel Monica Ellen WTP 20 18 16 14 12 10 Price $ 20. 01 and up 18. 01 - 20 16. 01 - 18 14. 01 - 16 12. 01 - 14 10. 01 - 12 0. 00 - 10 Who buys Nobody Rosalia, Seeye, Mehnaz, Rachel Rosalia, Seeye, Mehnaz, Rachel, Monica, Ellen QD 0 1 2 3 4 5 6
![Demand Schedule and Demand Curve P Price 20 01 and up 18 01 Demand Schedule and Demand Curve P Price $ 20. 01 and up 18. 01](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-11.jpg)
Demand Schedule and Demand Curve P Price $ 20. 01 and up 18. 01 - 20 16. 01 - 18 14. 01 - 16 12. 01 - 14 10. 01 - 12 0. 00 - 10 D Q QD 0 1 2 3 4 5 6
![The Sellers costs and the Supply Schedule Price Seller Kirk Golib Rebeca Chandrika Elisa The Sellers’ costs and the Supply Schedule Price Seller Kirk Golib Rebeca Chandrika Elisa](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-12.jpg)
The Sellers’ costs and the Supply Schedule Price Seller Kirk Golib Rebeca Chandrika Elisa Marina Valery Cost 6 8 10 12 14 16 18 $ 0 – 5. 99 6 – 7. 99 8 – 9. 99 10 – 11. 99 12 – 13. 99 14 – 15. 99 16 – 17. 99 18. 00 and up Who sells (write names) Nobody Kirk, Golib, Rebeca, Chandrika Kirk, Golib, Rebeca, Chandrika, Elisa, Marina, Valery QS 0 1 2 3 4 5 6 7
![Supply Schedule and Supply Curve P S Price 0 5 99 6 Supply Schedule and Supply Curve P S Price $ 0 – 5. 99 6](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-13.jpg)
Supply Schedule and Supply Curve P S Price $ 0 – 5. 99 6 – 7. 99 8 – 9. 99 10 – 11. 99 12 – 13. 99 14 – 15. 99 16 – 17. 99 18. 00 and up Q QS 0 1 2 3 4 5 6 7
![Equilibrium P Equilibrium Q 4 picture frames S Equilibrium price range from Equilibrium P Equilibrium Q = 4 picture frames S Equilibrium price range = from](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-14.jpg)
Equilibrium P Equilibrium Q = 4 picture frames S Equilibrium price range = from $12. 01 to $13. 99 P* D Q* Q
![3 Prices and Consumer Surplus 3. Prices and Consumer Surplus](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-15.jpg)
3. Prices and Consumer Surplus
![Students Turn What is the CS at Price 13 P S P D Q Student’s Turn: What is the CS at Price $13? P S P* D Q*](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-16.jpg)
Student’s Turn: What is the CS at Price $13? P S P* D Q* Q
![The CS at Price 13 P S Rosalia 20 13 7 Seeye The CS at Price $13 P S Rosalia: 20 - 13 = 7 Seeye:](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-17.jpg)
The CS at Price $13 P S Rosalia: 20 - 13 = 7 Seeye: 18 – 13 = 5 Mehnaz: 16 – 13 = 3 Rachel: 14 – 13 = 1 P* Total CS = 16 D Q* Q
![CS with Lots of Buyers a Smooth D Curve Price per pair At CS with Lots of Buyers & a Smooth D Curve Price per pair At](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-18.jpg)
CS with Lots of Buyers & a Smooth D Curve Price per pair At Q = 5(thousand), the marginal buyer is willing to pay $50 for pair of shoes. Suppose P = $30. Then his consumer surplus = $20. P The demand for shoes $ 1000 s of pairs of shoes D Q
![Calculating CS with a Smooth D Curve CS is the area between P and Calculating CS with a Smooth D Curve CS is the area between P and](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-19.jpg)
Calculating CS with a Smooth D Curve CS is the area between P and the D curve, from 0 to Q. Recall: Area of a triangle equals ½ x base x height Height = $60 – 30 = $30. So, CS = ½ x 15 x $30 = $225. P The demand for shoes $ h D Q
![How a higher price reduces CS in our example P S In the Price How a higher price reduces CS in our example… P S In the Price](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-20.jpg)
How a higher price reduces CS in our example… P S In the Price raises from $13 to $15, total CS decreases from $16 to $ 9. P*2 P*1 From the $7 loss in CS: • $ 6 are because each of the 3 buyers remaining pays $2 more per frame. • $ 1 is because one buyer left the market D Q* Q
![How a Higher Price Reduces CS in a smooth Demand Curve If P rises How a Higher Price Reduces CS in a smooth Demand Curve If P rises](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-21.jpg)
How a Higher Price Reduces CS in a smooth Demand Curve If P rises to $40, CS = ½ x 10 x $20 = $100. P 1. Fall in CS due to buyers leaving market Two reasons for the fall in CS. 2. Fall in CS due to remaining buyers paying higher P D Q
![STUDENTS TURN Consumer surplus A Find marginal buyers WTP at Q 10 B STUDENTS’ TURN: Consumer surplus A. Find marginal buyer’s WTP at Q = 10. B.](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-22.jpg)
STUDENTS’ TURN: Consumer surplus A. Find marginal buyer’s WTP at Q = 10. B. Find CS for P = $30. P demand curve $ Suppose P falls to $20. How much will CS increase due to… C. buyers entering the market D. existing buyers paying lower price Q
![Answers P demand curve A At Q 10 marginal buyers WTP is Answers P demand curve $ A. At Q = 10, marginal buyer’s WTP is](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-23.jpg)
Answers P demand curve $ A. At Q = 10, marginal buyer’s WTP is $30. B. CS = ½ x 10 x $10 = $50 P falls to $20. C. CS for the additional buyers = ½ x 10 x $10 = $50 D. Increase in CS on initial 10 units = 10 x $10 = $100 Q
![Principles of Microeconomics 09 Market Efficiency and Welfare Juan Pablo Chauvin August 4 2011 Principles of Microeconomics 09. Market Efficiency and Welfare* Juan Pablo Chauvin August 4, 2011](https://slidetodoc.com/presentation_image_h2/bfa207956ad7f3d4d20d3b5720f11b65/image-24.jpg)
Principles of Microeconomics 09. Market Efficiency and Welfare* Juan Pablo Chauvin August 4, 2011 * Slide content principally sourced from N. Gregory Mankiw “Principles of Economics” Premium Powe. Point
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