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Economic Efficiency

Sessions 6, 7 & 8 Economic Efficiency Consumer Surplus A buyer’s willingness to pay (WET) for a good is the maximum amount the buyer will pay for that good good. WET measures how much the buyer values the good. Example: 4 buyers’ WET for an pod name Anthony WET $250 Chad 175 Flea John 125 By Viand-Bight Q: If price of pod is $200, who will buy an pod, and what is quantity demanded? Q A: Anthony & Flea will buy an pod, Chad & John will not. Hence, Q = 2 when P = $200. Derive the demand schedule: P (price of pod) $301 & up 251 -300 who buys nobody Q 176 – 250

Anthony, Flea 2 126-175 Chad, Anthony, 3 John, Chad, 4 0-125 This D curve looks like a staircase with 4 steps – one per buyer. If there were a huge no. Of buyers, as in a competitive market, there would be a huge no. Of very tiny steps and it would look more like a smooth curve. $350 $300 $200 $150 $100 $50 $0 Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays: CSS Fleas CSS

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= $300 – 260 = $40. The others get no CSS because they do not buy an pod at this price. Total CSS Fleas WET p = $260 Fleas CSS $300 – 260 = $40

Total CSS = $40 The lesson: Total CSS equals the area under the demand curve above the price, from Tots. = $40. Anthony WET = $220 Suppose P $300 – 220 = $80 Antimony’s CSS $250-220 = $30 Total CSS=$110 Soc is the area b/w P and the D curve, f from O to Q. Recall: a triangle equals h x base x height Eight 60-30 = 30. So, CSS=hX15X30 225. = 225 The demand for shoes 50 h Pairs of shoes 20 10 510 15202530 If P rises to 40, CSS=hoaxing = 100. TWO fall in CSS. Flitch 2. Fall in 2 Afflicts due to remaining buyers paying higher P 1. Fall in CSS due to buyers leaving market

Producer Surplus Producer surplus is the analogous measure for producers. Some producers are producing units at a cost Just equal to the the market price. K it 2) market price, and would still be produced and sold even if price the market price was lower. Producers therefore enjoy a benefit – a surplus – from selling these units. 3) For each unit, the producer’s surplus is the difference between the market price the producer receives and the marginal ma signal cost of producing this unit. Pod icing Producer Surplus P Suppose P =40.

The supply of shoes s ATX= 15 the 15, the original seller’s cost is 30 and his producer surplus is 30 10. AS is the area b/w P and the S curve, The height of this triangle is 40-15=25. So, AS = h x b x h = h x 25 x 25 = 312. 50 If P falls to $30, = $112. 50 reasons for ease s o the fall in AS. 2 Filliped remaining sellers getting lower P 1. Fall in AS due to sellers leaving market Consumer Surplus and Producer Surplus What Consumer Surplus and Producer Surplus Measure Consumer surplus measures the p benefit to consumers from participating in a market, and producer surplus measures the benefit to producers from

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