3SUPPLYANDDEMANDII MARKETSANDWELFARE 7 Consumers Producers andtheEfficiencyofMarkets REVISITINGTHEMARKETEQUILIBRIUM Dotheequilibriumpriceandquantitymaximizethetotalwelfareofbuyersandsellers Marketequilibriumreflectsthewaymarketsallocatescarceresources Whetherthemarketallocationisdesirablecanbeaddressedbywelfareeconomics WelfareEconomics Welfareeconomicsisthestudyofhowtheallocationofresourcesaffectseconomicwell being Buyersandsellersreceivebenefitsfromtakingpartinthemarket Theequilibriuminamarketmaximizesthetotalwelfareofbuyersandsellers WelfareEconomics Equilibriuminthemarketresultsinmaximumbenefits andthereforemaximumtotalwelfareforboththeconsumersandtheproducersoftheproduct WelfareEconomics Consumersurplusmeasureseconomicwelfarefromthebuyer sside Producersurplusmeasureseconomicwelfarefromtheseller sside CONSUMERSURPLUS Willingnesstopayisthemaximumamountthatabuyerwillpayforagood Itmeasureshowmuchthebuyervaluesthegoodorservice CONSUMERSURPLUS Consumersurplusisthebuyer swillingnesstopayforagoodminustheamountthebuyeractuallypaysforit Table1FourPossibleBuyers WillingnesstoPay Copyright 2004South Western CONSUMERSURPLUS Themarketdemandcurvedepictsthevariousquantitiesthatbuyerswouldbewillingandabletopurchaseatdifferentprices TheDemandScheduleandtheDemandCurve Figure1TheDemandScheduleandtheDemandCurve Copyright 2003Southwestern ThomsonLearning Priceof Album 0 Quantityof Albums 1 2 3 4 Figure2MeasuringConsumerSurpluswiththeDemandCurve Copyright 2003Southwestern ThomsonLearning a Price 80 Priceof Album 50 70 80 0 100 1 2 3 4 Quantityof Albums Figure2MeasuringConsumerSurpluswiththeDemandCurve Copyright 2003Southwestern ThomsonLearning b Price 70 Priceof Album 50 70 80 0 100 1 2 3 4 Quantityof Albums UsingtheDemandCurvetoMeasureConsumerSurplus Theareabelowthedemandcurveandabovethepricemeasurestheconsumersurplusinthemarket Figure3HowthePriceAffectsConsumerSurplus Copyright 2003Southwestern ThomsonLearning Quantity a ConsumerSurplusatPrice P Price 0 Figure3HowthePriceAffectsConsumerSurplus Copyright 2003Southwestern ThomsonLearning Quantity b ConsumerSurplusatPrice P Price 0 WhatDoesConsumerSurplusMeasure Consumersurplus theamountthatbuyersarewillingtopayforagoodminustheamounttheyactuallypayforit measuresthebenefitthatbuyersreceivefromagoodasthebuyersthemselvesperceiveit PRODUCERSURPLUS Producersurplusistheamountasellerispaidforagoodminustheseller scost Itmeasuresthebenefittosellersparticipatinginamarket Table2TheCostsofFourPossibleSellers Copyright 2004South Western UsingtheSupplyCurvetoMeasureProducerSurplus Justasconsumersurplusisrelatedtothedemandcurve producersurplusiscloselyrelatedtothesupplycurve TheSupplyScheduleandtheSupplyCurve Figure4TheSupplyScheduleandtheSupplyCurve UsingtheSupplyCurvetoMeasureProducerSurplus Theareabelowthepriceandabovethesupplycurvemeasurestheproducersurplusinamarket Figure5MeasuringProducerSurpluswiththeSupplyCurve Copyright 2003Southwestern ThomsonLearning Quantityof HousesPainted Priceof House Painting 500 800 900 0 600 1 2 3 4 a Price 600 Figure5MeasuringProducerSurpluswiththeSupplyCurve Copyright 2003Southwestern ThomsonLearning Quantityof HousesPainted Priceof House Painting 500 800 900 0 600 1 2 3 4 b Price 800 Figure6HowthePriceAffectsProducerSurplus Copyright 2003Southwestern ThomsonLearning Quantity a ProducerSurplusatPrice P Price 0 Figure6HowthePriceAffectsProducerSurplus Copyright 2003Southwestern ThomsonLearning Quantity b ProducerSurplusatPrice P Price 0 P1 B C Supply A Initial producer surplus Q1 MARKETEFFICIENCY Consumersurplusandproducersurplusmaybeusedtoaddressthefollowingquestion Istheallocationofresourcesdeterminedbyfreemarketsinanywaydesirable MARKETEFFICIENCY ConsumerSurplus Valuetobuyers AmountpaidbybuyersandProducerSurplus Amountreceivedbysellers Costtosellers MARKETEFFICIENCY Totalsurplus Consumersurplus ProducersurplusorTotalsurplus Valuetobuyers Costtosellers MARKETEFFICIENCY Efficiencyisthepropertyofaresourceallocationofmaximizingthetotalsurplusreceivedbyallmembersofsociety MARKETEFFICIENCY Inadditiontomarketefficiency asocialplannermightalsocareaboutequity thefairnessofthedistributionofwell beingamongthevariousbuyersandsellers Figure7ConsumerandProducerSurplusintheMarketEquilibrium Copyright 2003Southwestern ThomsonLearning Price 0 Quantity MARKETEFFICIENCY ThreeInsightsConcerningMarketOutcomesFreemarketsallocatethesupplyofgoodstothebuyerswhovaluethemmosthighly asmeasuredbytheirwillingnesstopay Freemarketsallocatethedemandforgoodstothesellerswhocanproducethematleastcost Freemarketsproducethequantityofgoodsthatmaximizesthesumofconsumerandproducersurplus Figure8TheEfficiencyoftheEquilibriumQuantity Copyright 2003Southwestern ThomsonLearning Quantity Price 0 EvaluatingtheMarketEquilibrium Becausetheequilibriumoutcomeisanefficientallocationofresources thesocialplannercanleavethemarketoutcomeashe shefindsit ThispolicyofleavingwellenoughalonegoesbytheFrenchexpressionlaissezfaire EvaluatingtheMarketEquilibrium MarketPowerIfamarketsystemisnotperfectlycompetitive ma