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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
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
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!
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 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
– Training your brain to understand value训练你的大脑明白什么意思值
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)
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?
If MB > MC = keep going!If MB = MC = Perfect amount! If MB < MC = too much!
Cans of Soda
Total Utility (U)
Marginal Utility (MU)
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.
If MB > MC = keep going!If MB = MC = Perfect amount! If MB < MC = too much!
Cans of Soda
Total Utility (U)
Marginal Utility (MU)
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!
If MB > MC = keep going!If MB = MC = Perfect amount! If MB < MC = too much!
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
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.
Consumer Surplus (CS)
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
WTP and the Demand Curve
P Qd
6000 & up 0
4501 – 5250 1
3751 – 4500 2
3000 – 3750 3
0 – 3000 4
P
Q
WTP and the Demand Curve
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
WTP and the Demand Curve
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.
Consumer Surplus (CS)
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
CS and the Demand Curve
P
Q35
The lesson:Total CS equals the area under
the demand curve above the price, from 0 to
Q.
CS and the Demand Curve
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.
CS and the Demand Curve
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
The demand for shoes
D
CS is the area b/w P and the D curve, from 0 to Q.
CS and the Demand Curve
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)
Textbook Definition The marginal benefit from a good or service minus
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
Cost and the Supply Curve
$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
Cost and the Supply Curve
$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
Producer Surplus (PS)
$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.
Producer Surplus (PS) and the Supply Curve
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.
Producer Surplus (PS) and the Supply Curve
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
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 not.
D
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. 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
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 not.
S
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. 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
Does EQ Maximize Total Surplus?
0
10
20
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.
Does EQ Maximize Total Surplus?
“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
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
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 Thinking
– Training your brain to understand value训练你的大脑明白什么意思值
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.
– 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
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…
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
0
10
20
30
40
50
60
0 5 10 15 20 25 30
P
Q
The demand for shoes
D
CS is the area b/w P and the D curve, from 0 to Q.
CS and the Demand Curve
Producer Surplus (PS)
Textbook Definition The marginal benefit from a good or service minus
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.
Producer Surplus (PS) and the Supply Curve
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.
Does EQ Maximize Total Surplus?
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
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