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![7 Consumers, Producers, and the Efficiency of Markets](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-1.jpg)
7
Consumers, Producers, and the Efficiency of Markets
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![REVISITING THE MARKET EQUILIBRIUM Do the equilibrium price and quantity](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-2.jpg)
REVISITING THE MARKET EQUILIBRIUM
Do the equilibrium price and quantity maximize the
total welfare of buyers and sellers?
Market equilibrium reflects the way markets allocate scarce resources.
Whether the market allocation is desirable can be addressed by welfare economics.
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![Welfare Economics Welfare economics is the study of how the](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-3.jpg)
Welfare Economics
Welfare economics is the study of how the allocation of
resources affects economic well-being.
Buyers and sellers receive benefits from taking part in the market.
The equilibrium in a market maximizes the total welfare of buyers and sellers.
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![Welfare Economics Equilibrium in the market results in maximum benefits,](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-4.jpg)
Welfare Economics
Equilibrium in the market results in maximum benefits, and therefore
maximum total welfare for both the consumers and the producers of the product.
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![Welfare Economics Consumer surplus measures economic welfare from the buyer’s](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-5.jpg)
Welfare Economics
Consumer surplus measures economic welfare from the buyer’s side.
Producer surplus
measures economic welfare from the seller’s side.
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![CONSUMER SURPLUS Willingness to pay is the maximum amount that](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-6.jpg)
CONSUMER SURPLUS
Willingness to pay is the maximum amount that a buyer
will pay for a good.
It measures how much the buyer values the good or service.
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![CONSUMER SURPLUS Consumer surplus is the buyer’s willingness to pay](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-7.jpg)
CONSUMER SURPLUS
Consumer surplus is the buyer’s willingness to pay for a
good minus the amount the buyer actually pays for it.
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![Table 1 Four Possible Buyers’ Willingness to Pay Copyright©2004 South-Western](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-8.jpg)
Table 1 Four Possible Buyers’ Willingness to Pay
Copyright©2004 South-Western
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![CONSUMER SURPLUS The market demand curve depicts the various quantities](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-9.jpg)
CONSUMER SURPLUS
The market demand curve depicts the various quantities that buyers
would be willing and able to purchase at different prices.
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![The Demand Schedule and the Demand Curve](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-10.jpg)
The Demand Schedule and the Demand Curve
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![Figure 1 The Demand Schedule and the Demand Curve Copyright©2003](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-11.jpg)
Figure 1 The Demand Schedule and the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
Price
of
Album
0
Quantity of
Albums
1
2
3
4
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![Figure 2 Measuring Consumer Surplus with the Demand Curve Copyright©2003](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-12.jpg)
Figure 2 Measuring Consumer Surplus with the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
(a)
Price = $80
Price of
Album
50
70
80
0
$100
1
2
3
4
Quantity of
Albums
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![Figure 2 Measuring Consumer Surplus with the Demand Curve Copyright©2003](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-13.jpg)
Figure 2 Measuring Consumer Surplus with the Demand Curve
Copyright©2003 Southwestern/Thomson Learning
(b)
Price = $70
Price of
Album
50
70
80
0
$100
1
2
3
4
Quantity of
Albums
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![Using the Demand Curve to Measure Consumer Surplus The area](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-14.jpg)
Using the Demand Curve to Measure Consumer Surplus
The area below the
demand curve and above the price measures the consumer surplus in the market.
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![Figure 3 How the Price Affects Consumer Surplus Copyright©2003 Southwestern/Thomson](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-15.jpg)
Figure 3 How the Price Affects Consumer Surplus
Copyright©2003 Southwestern/Thomson Learning
Quantity
(a) Consumer
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![Figure 3 How the Price Affects Consumer Surplus Copyright©2003 Southwestern/Thomson](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-16.jpg)
Figure 3 How the Price Affects Consumer Surplus
Copyright©2003 Southwestern/Thomson Learning
Quantity
(b) Consumer
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![What Does Consumer Surplus Measure? Consumer surplus, the amount that](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-17.jpg)
What Does Consumer Surplus Measure?
Consumer surplus, the amount that buyers are
willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it.
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![PRODUCER SURPLUS Producer surplus is the amount a seller is](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-18.jpg)
PRODUCER SURPLUS
Producer surplus is the amount a seller is paid for
a good minus the seller’s cost.
It measures the benefit to sellers participating in a market.
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![Table 2 The Costs of Four Possible Sellers Copyright©2004 South-Western](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-19.jpg)
Table 2 The Costs of Four Possible Sellers
Copyright©2004 South-Western
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![Using the Supply Curve to Measure Producer Surplus Just as](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-20.jpg)
Using the Supply Curve to Measure Producer Surplus
Just as consumer surplus
is related to the demand curve, producer surplus is closely related to the supply curve.
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![The Supply Schedule and the Supply Curve](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-21.jpg)
The Supply Schedule and the Supply Curve
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![Figure 4 The Supply Schedule and the Supply Curve](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-22.jpg)
Figure 4 The Supply Schedule and the Supply Curve
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![Using the Supply Curve to Measure Producer Surplus The area](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-23.jpg)
Using the Supply Curve to Measure Producer Surplus
The area below the
price and above the supply curve measures the producer surplus in a market.
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![Figure 5 Measuring Producer Surplus with the Supply Curve Copyright©2003](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-24.jpg)
Figure 5 Measuring Producer Surplus with the Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Quantity
of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1
2
3
4
(a) Price = $600
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![Figure 5 Measuring Producer Surplus with the Supply Curve Copyright©2003](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-25.jpg)
Figure 5 Measuring Producer Surplus with the Supply Curve
Copyright©2003 Southwestern/Thomson Learning
Quantity
of
Houses Painted
Price of
House
Painting
500
800
$900
0
600
1
2
3
4
(b) Price = $800
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![Figure 6 How the Price Affects Producer Surplus Copyright©2003 Southwestern/Thomson](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-26.jpg)
Figure 6 How the Price Affects Producer Surplus
Copyright©2003 Southwestern/Thomson Learning
Quantity
(a) Producer
Surplus at Price
P
Price
0
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![Figure 6 How the Price Affects Producer Surplus Copyright©2003 Southwestern/Thomson](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-27.jpg)
Figure 6 How the Price Affects Producer Surplus
Copyright©2003 Southwestern/Thomson Learning
Quantity
(b) Producer
Surplus at Price
P
Price
0
P1
B
C
Supply
A
Initial
producer
surplus
Q1
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![MARKET EFFICIENCY Consumer surplus and producer surplus may be used](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-28.jpg)
MARKET EFFICIENCY
Consumer surplus and producer surplus may be used to address
the following question:
Is the allocation of resources determined by free markets in any way desirable?
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![MARKET EFFICIENCY Consumer Surplus = Value to buyers – Amount](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-29.jpg)
MARKET EFFICIENCY
Consumer Surplus
= Value to buyers – Amount paid by
buyers
and
Producer Surplus
= Amount received by sellers – Cost to sellers
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![MARKET EFFICIENCY Total surplus = Consumer surplus + Producer surplus](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-30.jpg)
MARKET EFFICIENCY
Total surplus
= Consumer surplus + Producer surplus
or
Total surplus
=
Value to buyers – Cost to sellers
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![MARKET EFFICIENCY Efficiency is the property of a resource allocation](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-31.jpg)
MARKET EFFICIENCY
Efficiency is the property of a resource allocation of maximizing
the total surplus received by all members of society.
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![MARKET EFFICIENCY In addition to market efficiency, a social planner](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-32.jpg)
MARKET EFFICIENCY
In addition to market efficiency, a social planner might also
care about equity – the fairness of the distribution of well-being among the various buyers and sellers.
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![Figure 7 Consumer and Producer Surplus in the Market Equilibrium Copyright©2003 Southwestern/Thomson Learning Price 0 Quantity](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-33.jpg)
Figure 7 Consumer and Producer Surplus in the Market Equilibrium
Copyright©2003 Southwestern/Thomson
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![MARKET EFFICIENCY Three Insights Concerning Market Outcomes Free markets allocate](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-34.jpg)
MARKET EFFICIENCY
Three Insights Concerning Market Outcomes
Free markets allocate the supply
of goods to the buyers who value them most highly, as measured by their willingness to pay.
Free markets allocate the demand for goods to the sellers who can produce them at least cost.
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.
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![Figure 8 The Efficiency of the Equilibrium Quantity Copyright©2003 Southwestern/Thomson Learning Quantity Price 0](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-35.jpg)
Figure 8 The Efficiency of the Equilibrium Quantity
Copyright©2003 Southwestern/Thomson Learning
Quantity
Price
0
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![Evaluating the Market Equilibrium Because the equilibrium outcome is an](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-36.jpg)
Evaluating the Market Equilibrium
Because the equilibrium outcome is an efficient allocation
of resources, the social planner can leave the market outcome as he/she finds it.
This policy of leaving well enough alone goes by the French expression laissez faire.
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![Evaluating the Market Equilibrium Market Power If a market system](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-37.jpg)
Evaluating the Market Equilibrium
Market Power
If a market system is not
perfectly competitive, market power may result.
Market power is the ability to influence prices.
Market power can cause markets to be inefficient because it keeps price and quantity from the equilibrium of supply and demand.
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![Evaluating the Market Equilibrium Externalities created when a market outcome](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-38.jpg)
Evaluating the Market Equilibrium
Externalities
created when a market outcome affects individuals
other than buyers and sellers in that market.
cause welfare in a market to depend on more than just the value to the buyers and cost to the sellers.
When buyers and sellers do not take externalities into account when deciding how much to consume and produce, the equilibrium in the market can be inefficient.
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![Summary Consumer surplus equals buyers’ willingness to pay for a](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-39.jpg)
Summary
Consumer surplus equals buyers’ willingness to pay for a good minus
the amount they actually pay for it.
Consumer surplus measures the benefit buyers get from participating in a market.
Consumer surplus can be computed by finding the area below the demand curve and above the price.
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![Summary Producer surplus equals the amount sellers receive for their](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-40.jpg)
Summary
Producer surplus equals the amount sellers receive for their goods minus
their costs of production.
Producer surplus measures the benefit sellers get from participating in a market.
Producer surplus can be computed by finding the area below the price and above the supply curve.
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![Summary An allocation of resources that maximizes the sum of](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/141041/slide-41.jpg)
Summary
An allocation of resources that maximizes the sum of consumer and
producer surplus is said to be efficient.
Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.