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121
rkets
WHAT’S NEW IN THE SEVENTH EDITION:
There is a new
In the News
feature on "The Invisible Hand Can Park Your Car."
LEARNING OBJECTIVES:
the link between buyers’ willingness to pay for a good and the demand curve.
how to define and measure consumer surplus.
how to define and measure producer surplus.
that the equilibrium of supply and demand maximizes total surplus in a market.
CONTEXT AND PURPOSE:
resources affects economic well-being. Chapters 4 through 6 employed supply and demand in a positive
framework, which focused on the question, “What is the equilibrium price and quantity in a market?” This
chapter now addresses the normative question, “Is the equilibrium price and quantity in a market the
7
CONSUMERS, PRODUCERS, AND
THE EFFICIENCY OF MARKETS
124 ❖ Chapter 7/Consumers, Producers, and the Efficiency of Markets
B. Using the Demand Curve to Measure Consumer Surplus
1. We can use the information on willingness to pay to derive a demand curve for the rare Elvis
Presley album.
Price
Buyers
Quantity
Demanded
More than
$100
None
0
$80 to $100
John
1
$70 to $80
John, Paul
2
$50 to $70
John, Paul,
George
3
$50 or less
John, Paul,
George, Ringo
4
2. At any given quantity, the price given by the demand curve reflects the willingness to pay of
3. Consumer surplus can be measured as the area below the demand curve and above the
price.
C. How a Lower Price Raises Consumer Surplus
Figure 1
Figure 2
Figure 3
“This represents the demand curve for the time machine. Consumer surplus is the difference
between what consumers are willing to pay and the amount they actually have to pay. The
market price will determine who uses the time machine and how much surplus they keep.”
“If the price of a time machine ride was $500, three rides would be sold—one to Scott, one to
Carol, and one to Steve. Jeanne is not willing to pay $500, so she wouldn’t time travel.”
“We can calculate the consumer surplus of three time trips. Scott would pay $3,000 but only
pays $500, leaving $2,500 of net benefits.” (Put these numbers on the board.) “Carol has net
benefits of $2,000. Steve has $300 in net benefits. Adding up these net savings gives $4,800
in consumer surplus.”
Points for Discussion
The consumer surplus depends on a good’s selling price and the number of consumers who
are willing to purchase the good at that price. The lower the price, the greater the consumer
surplus.
Quantity
80
Price of
Album
1
2
3
4
0
100
70
50
Demand
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1. As price rises, producer surplus increases for two reasons.
b. Because the price is now higher, some new sellers will enter the market and receive
producer surplus on these additional units of output sold (area D on the graph).
IV. Market Efficiency
A. The Benevolent Social Planner
Total Surplus = Consumer Surplus + Producer Surplus
Total Surplus = (Value to Buyers – Amount Paid by Buyers) +
(Amount Received by Sellers – Cost to Sellers)
Figure 6
ALTERNATIVE CLASSROOM EXAMPLE:
Review the material on price floors from Chapter 6. Redraw the market for an agricultural
product such as corn. Draw in a price support above the equilibrium price.
Then go through:
producer surplus before the price support is put in place.
producer surplus after the price support is put in place.
Make sure that you discuss the cost of the price support to taxpayers.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Sellers:
2. Definition of efficiency: the property of a resource allocation of maximizing the
3. Definition of equality: the property of distributing economic prosperity uniformly
the members of society.
B. Evaluating the Market Equilibrium
1. At the market equilibrium price:
their willingness to pay.
b. Sellers whose costs are lower than the equilibrium price will produce the product; those
whose costs are higher, will not produce the product. In other words, the free market
allocates the demand for goods to the sellers who can produce it at the lowest cost.
Total Surplus = Value to Buyers Cost to Sellers
Figure 7
Now might be a good time to point out that many government policies involve a
trade-off between efficiency and equity. When you evaluate government policies, like
price ceilings or floors, you can explain them in terms of equity and efficiency.
