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ECON 101 Chapter 4

by: Megan Lester

ECON 101 Chapter 4 Econ 101

Megan Lester
GPA 2.8

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class notes
Fr. Timmons
Class Notes
Econ, Economics, Microeconomic
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This 7 page Class Notes was uploaded by Megan Lester on Wednesday September 28, 2016. The Class Notes belongs to Econ 101 at Washington State University taught by Fr. Timmons in Spring 2015. Since its upload, it has received 2 views.


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Date Created: 09/28/16
Chapter 4 Tuesday, February 10, 2015 10:42 AM Chapter 4: Consumer & Producer Surplus: Introduction to Welfare (policy) analysis. What’s behind Supply and Demand? • Learning Objectives ○ Understand Consumer Surplus ○ Understand Producer Surplus ○ Use Consumer and Producer Surplus to ○ discuss societal effects of changes in the ○ market.  Winners vs. Losers  Welfare Analysis ○ Connect the importance of this chapter inapplied economics. • Introduction ○ You know Supply and Demand  Predict changes in the market before they occur.  Advice on strategy for firms and government.  Work towards ‘affecting’ Supply and Demand ○ (same as above… more or less). ○ Now, we attempt to conduct welfare analysis  – Compare different market structures.  – Tell policymakers if society is better, worse, or about the same after a policy. • What will we do? ○ Consumer Surplus ○ Producer Surplus ○ Let’s measure this using data – Excel ○ workbook ‘Chapter 4’  Graph is pre-loaded.  Price-line is also included (denotes equilibrium price). • Consumer Surplus ○ The dollar benefit consumers receive from buying goods or services in a particular market.  The difference between the highest price a consumer is willing-to-pay (WTP) and the price the consumer actually pays.  The savings from consuming.  Restricted by income. • Consumers are willing to purchase a product up to the point where the willingness to pay (WTP), or marginal benefit, of consuming a product is equal to its price. • Total Consumer Surplus ○ At a market price of $3.50, Consumer Surplus is:  Theresa: $6 - $3.50 = $2.50  Tom: $5 - $3.50 = $1.50  Terri: $4 - $3.50 = $0.50  Consumer Surplus of the Market: $2.50 + $1.50 + $0.50 = $4.50. ○ Total consumer surplus in this market is equal to the sum of the areas of rectangles A, B, and C. • We tend to use smooth Demand Curves. ○ Consumer Surplus is the total area below the demand curve and above the market price. • Producer Surplus ○ The dollar benefit firms receive from selling in a particular market.  Profit, difference between revenue and cost.  The difference between the lowest price a firm would be willing-to-accept (WTA) and the price it actually receives. ○ Depends on the cost of producing it. ○ Firms will supply an additional unit of a product if they receive a price equal to the additional cost of producing that unit, that is the Marginal Cost. ○ In Producer Surplus, the Marginal Benefit is the market Price. • Producer Surplus given a price of $1.75 per cup: ○ First Cup: $1.75 - $1.00 = $0.75. ○ Second Cup: $1.75 - $1.25 = $0.50. ○ Third Cup: $1.75 - $1.50 = $0.25. ○ Total Producer Surplus: $0.75 + $0.50 + $0.25 = $1.5 $1.50. ○ Producer Surplus is the area of the triangle under the price and above the Supply Curve. • What does Consumer and Producer Surplus Measure ○ Each is a net benefit to one side of the market. ○ Consumer Surplus (CS): benefit to consumers from participating in a market (savings).  CS = WTP – Price. ○ Producer Surplus (PS): benefit to producers from participating in a market (profit).  PS = Price – WTA. ○ Total Surplus (TS – Welfare) is the sum of Consumer and Producer Surplus.  TS = CS + PS  TS = CS + PS • Total Surplus • What does Consumer and Producer Surplus tell us? ○ a. How much of the market consumers and producers benefit from. ○ b. A means of comparing different market outcomes. ○ c. The willingness to pay and willingness to accept. ○ d. A way to determine Supply and Demand. ○ e. All of the above. • Each side of the market follows its Law. ○ First thing first, what is the equilibrium price and quantity? ○ Why is this important?  a. Tell us what the market conditions are at this point in time.  b. Because you asked.  c. It is an important piece of information to measure CS and PS.  d. A and C  e. None of the above • Market for books • Who is in the market? • Calculating Consumer Surplus (CS) MWTP = Maximum Willingness to Pay ○ MWTP = Maximum Willingness to Pay ○ CS = MWTP – Price ○ Here, TCS = 0 + 5 + 10 + 15 + 20 + 25 = $75 ○ We do not include negative CS, they are not in the market. • Calculating Producer Surplus ○ MWTP = Maximum Willingness to Pay ○ PS = Price – MWTA ○ Here, TPS = 30 + 25 + 20 + 15 + 10 + 5 + 0 = $105 • We do not include negative PS, they are not in the market. • Gains from trade ○ Gains from Trade, both consumers and producers are better off because there is a market in this good. ○ These gains from trade are the reason everyone is better off participating in a market economy than they would be if each individual tried to be self-sufficient. ○ The total surplus generated in a market is the total net gain to consumers and producers from trading in the market. • Total Surplus: Measure of Welfare ○ By comparing the total surplus generated by the consumption and production choices in the market equilibrium to the surplus generated by a different set of production and consumption choices, we can show that any change from the market equilibrium reduces total surplus. ○ Total Surplus (TS) = CS + PS = $75 + $105 = $180. ○ What happens when the price is set at $95? ○ TCS is? ○ TPS is? TS is? ○ TS is? ○ Winners and losers? ○ What happens when the price is set at $75? ○ TCS is? ○ TPS is? ○ TS is? ○ Winners and losers?


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