ECON 200 Chapter 5
ECON 200 Chapter 5 ECON 200
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This 3 page Class Notes was uploaded by Lucy Notetaker on Wednesday September 14, 2016. The Class Notes belongs to ECON 200 at University of Maryland taught by Dr. Robert Schwab in Fall 2016. Since its upload, it has received 157 views. For similar materials see Principles of Economics: Microeconomics in Economics at University of Maryland.
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Date Created: 09/14/16
ECON Chapter 5: Efficiency Voluntary exchanges create value and can make everyone involved better of When I say be efficient, maybe you think of structuring your class schedule in a way that all of your buildings are close or using your time in a productive way. I always write this before reading the chapter, but I can assume the definition in ECON will be comparable. Willingness to Pay and Sell - Good markets always start with a desire to buy or sell. Buyers want what they want for the lowest price possible and everyone has a “maximum price” in their head Willingness to Pay/Reservation Price: the maximum price that a buyer would be willing to pay for a good or service - Have you ever been to another country or a place where haggling the price is acceptable/expected? If you have, then you know that if you see a necklace you like and the man is selling it for twenty dollars, you mentally think what you are willing to pay. If you are willing to pay 15 dollars, you might try and go down to 10, and settle on 15 if the seller won’t budge, because that is your maximum price. Willingness to Sell: a minimum price that a seller is willing to accept in exchange for a good or service - Going back to my past example, let’s say our necklace seller is dead set on gaining at least 15 dollars. He is obviously trying to get 20, but he’ll probably take an ofer of 15. Willingness to Pay and the Demand Curve - For this demonstration we are going to take a piece of artwork being sold at an auction. A local artist who has lots of talent, but is not well recognized paints it. - You have three bidders. 1. A mom who needs a nice picture to put in her living room, she has $55 in her pocket to buy it 2. A big fan of his work that collects all of their paintings. He brought $200. 3. A man who needs a gift for his mother, so he brings $105. - If you assign each buyer a number on the x axis and plot the price they are willing to pay, you will notice a loose shape of the demand curve - Page 102 will allow you to visualize this Willingness to Sell and the Supply Curve - To keep things consistent, we are now going to look at three artists and their sculptures. They are very similar in terms of material and time spent, but here are their respective situations. 1. An art student who needs the money to cover next year’s tuition, he will sell his sculpture for $75. 2. A widow who sculpts in her free time. She wishes to make at least $100 for her work. 3. A professional artist who needs this money to further her career, she wants $200. - So if you plot the points again, using the same axis’s as the demand…you see a loose drawing of the supply curve Measuring Surplus Surplus: a way of measuring who benefits from transactions and by how much - It is the diference between what you buy an item for and what you mentally were ready to pay. If the actual was under the willing to buy then you would have a surplus of money. Consumer Surplus: the net benefit that a customer receives from purchasing a good or service measured by the diference between willingness to pay and the actual price - Back to the artwork example, let’s say the art piece sells for $100, buyer #2, the big fan of his would have an individual surplus of $100 because he was willing to pay $200. - The total consumer surplus for the market of this piece of art would be $100+$5+$0 (the mom’s price was below, but there is no such thing as negative surplus) - If you draw a line where the actual price is you can visual the surpluses for each person Producer Surplus: the net benefit that a producer receives from the sale of a good or service. It is measured by the price sold and the producer’s minimum price they were willing to sell for - I’m not going to retype everything out because that’s just an excessive amount of words. You follow the same procedure as with the buyers, but when you draw the line on the graph look under the line to see the surplus, opposed to over the line with the buyers. - If my description of charts isn’t making sense, just skim the chapter and you’ll see what I’m talking about Total Surplus: a measure of the combined benefits that everyone receives from participating in an exchange of goods or services - To get this you add up everyone’s surplus (both buyers and sellers) Zero Sum Game: a situation in which whenever one person gains another loses an equal amount and the net value is zero (this is not true in economics- this is not a basketball game) - In this case everyone wins, buyers get products and sellers get money Using Surplus to Compare Alternatives - This concept of buyers and sellers perfectly illustrates the middle point in which the price satisfies both parties (equilibrium point) - Prices above the equilibrium and below the equilibrium will drop total surplus, one hurts sellers and the other hurts buyers Efficient Market: Yay! The concept of the entire chapter comes back. This is an arrangement such that no exchange can make anyone better of without someone becoming worse of - When the price is not the equilibrium one group (buyers or sellers) may benefit a little bit, but total surplus will decrease Deadweight Loss: a loss of total surplus that occurs because the quantity of a good that is bought and sold is below the market equilibrium quantity - This is because fewer exchanges are taking place - How to calculate: Total surplus at equilibrium (before intervention)-total surplus after intervention - Or we can look at the graph and calculate the area of the triangle where supply and demand overlap - The price is the indirect cause of this, the fewer transactions is the direct cause - Missing market: when there is desire to sell or buy but no venue. - Example: I like to collect lego minifigures and I was looking for a good trading post. In the beginning it was hard to find a good one. I would argue that that is a missing market.
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