intro to food and resource economics - week 7
intro to food and resource economics - week 7 2713
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This 11 page Class Notes was uploaded by Taylor Baker on Friday September 30, 2016. The Class Notes belongs to 2713 at Mississippi State University taught by Danny Barefield in Fall 2016. Since its upload, it has received 6 views. For similar materials see Intro to Food & Resource Econ in agricultural economics at Mississippi State University.
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Date Created: 09/30/16
Intro to Food and Resource Economics Week 7 - September 26-30, 2016 Chapter 7 Continued: Very Important Chapter - Ranked with Chapter 4 Consumer Surplus, Producer Surplus and Total Surplus (VERY IMPORTANT SLIDE; KNOW IT) - Consumer Surplus = Value to Buyers – Amount Paid by Buyers - (Consumer Surplus) = Buyers’ gains from participating in market • Producer Surplus = Amount Received by Sellers – Cost to Sellers • (Producer Surplus) = Sellers’ gains from participating in market • producer surplus can really be thought of as profit • if prices increase p. surplus goes up • Total Surplus = Consumer Surplus + Producer Surplus • (Total Surplus) = Total gains from trade in a market • (Total Surplus) = Value to Buyers – Cost to Sellers ______________________________________________________________ The Market’s Allocation of Resources - In a market economy, the allocation of resources is decentralized, determined by the interactions of self- interested buyers and sellers • Is the market’s allocation of resources desirable? Or would a different allocation of resources make society better off? • To answer this, we use total surplus as a measure of society’s well being and we consider whether the market’s allocation is efficient • efficiency = maximizing the combination (sum) of producer and consumer surplus ▪ Policymakers also care about equality, though our focus is on efficiency ▪ equality = everyone is being treated equally Efficiency: Total Surplus = value to buyers - cost to sellers • An allocation of resources is efficient if it maximizes total surplus. Efficiency means: ▪ The goods/services are consumed by the buyers who value them most highly ▪ The goods/services are produced by the producers with the lowest costs ▪ Raising or lowering the quantity of a good/service would not increase total surplus - The top triangle is the value to buyers (whats touching the demand curve) - the bottom triangle is the cost to sellers (whats touching the supply curve) Evaluating the market Equilibrium: - Market Equilibrium - Price = $30 - Quantity = 15,000 - Consumer Surplus = $225,000 - Producer Surplus = $150,000 - Total Surplus = $375,000 - Is the market equilibrium efficient? Which buyer consumers the good? - The buyers who value the good/service most highly are the ones who will consume it. Which sellers produce the good? - The sellers with the lowest cost will produce the good/ service. Does the Equilibrium Quantity Maximize Total Surplus? - If Quantity = 20,000 - The cost of producing the marginal (20,000 ) unit is $38 - The value to customers of the marginal (20,000 ) unit is $20 - Total Surplus is equal to areas A + B - Total Surplus can increased by reducing the quantity. - This is true at any quantity greater than 15. - if Quantity = 10,000 - the cost of producing the marginal (10,000th) unit is $23 - the value to customers of the marginal (10,000th) unit is $40 - Total surplus is equal to areas A + B - Total Surplus can increased by increasing the quantity. - This is true at any quantity less than 15,000. er A um onsp ls C S ur B Producer Surplus - The market equilibrium quantity maximizes total surplAt. any other quantity, the level of total surplus can increase by moving toward the market equilibrium quantity. Free Markets vs Government Intervention - The market equilibrium is efficient. No other outcomes achieves higher total surplus - Government cannot raise total surplus (benefit to the market) by changing the market’s allocation of resources. - Laissez faire (French for “allow them to do”) is used by policymakers to advance the notion that government should not interfere with the market Free Markets vs Central Planning - Suppose resources were allocated not by the market, but by a central planner who (supposedly) cares about society’s well- being • To allocate resources efficiently and maximize total surplus, the planner would need to know every seller’s cost and every buyer’s Willingness To Pay for every good in the entire economy • This is impossible and why centrally-planned economies are never very efficient (e.g., the former Soviet Union) Adam Smith and the Invisible Hand Passages from The Wealth of Nations, 1776 - “Man has almost constant occasion for the help of his brethren, and it is vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them… It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest… Every individual … neither intends to promote the public interest, nor knows how much he is promoting it … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” - its vain for that person who needs help to expect it just out of the goodness of others heart because people will begin to expect something in return Summary: - The height of the demand curve reflects the value of the good to buyers – their willingness to pay for the good. Buyers are willing to buy the good if their Willingness To Pay is greater than or equal to the price. - Consumer surplus is the difference between what buyers are willing to pay for a good and what they actually pay - On a graph, consumer surplus is the area between price and the demand curve - The height of the supply curve (cost curve) is the sellers’ cost of producing the good. Sellers are willing to sell if the price they get is at least as high as their cost. - Producer surplus is the difference between the price sellers receive for a good and their cost of producing it - On a graph, producer surplus is the area between price and the supply curve - To measure society’s well-being, we use total surplus, the sum of consumer and producer surplus - Efficiency means that total surplus is maximized, that the goods are produced by sellers with the lowest cost and that they are consumed by buyers who value them the most - Under perfect competition, the market outcome is efficient. Intervening in this market would reduce total surplus. - This chapter used welfare economics to demonstrate that markets are usually a good way to organize economic activity NOTE: These lessons assumed perfectly competitive ▪ markets • In other conditions, markets may fail to allocate resources efficiently. This happens when: ▪ A buyer or seller has market power – ability to affect market price ▪ Transactions have externalities that affect bystanders Chapter 8: Application: The Cost of Taxation Review from Chapter 6: - a tax: - drives a wedge between the price that buyers pay and the price that sellers receive - taxes will always raise the price that buyers pay and lower the price that the sellers receive unless we have a perfectly elastic demand or perfectly elastic supply curve (they are horizontal and the prices are fixed) - tax will also reduces the quantity bought and sold - governments get the tax money unless its a subsidized loan or purchase or program (subsidies are the opposite of tax) Effects of a tax: - equilibrium with no tax: - price = Pe - quantity = Qe h - Equilibrium with tax = $T per unit: n r t - buyers pay Pb ise i e w - sellers receive Ps e l m - quantity = Qt r u s g gs u The solid red n l triangle is e a n p x roughly the h ri o r amount of lost t t u t tax - no one get CS it The grey Consumer Surplus without tax rectangle is the amount of tax Producer Surplus without tax the Purple triangle is the producer surplus with tax - Revenue from tax = $T x Qt - next we apply welfare economics to measure the gains and losses from a tax - we determine consumer surplus, producer surplus, tax revenue, and total surplus with and without the tax - tax revenue can fund beneficial services such as education, roads and bridges, police and fire protection, so we include it in this analysis - without a tax: - consumer surplus = A + B + C - producer surplus = D + E + F - tax revenue = $0 - total surplus - = Consumer surplus + producer surplus - = A + B + C + D + E + F - With a tax: -consumer surplus = A -producer surplus = F -tax revenue = B + D - total surplus: - = consumer surplus + producer surplus + tax revenue - = A + B + D + F - the tax reduces the total surplus by C + E - C + E is called the deadweight loss of the tax. It is the fall in total surplus that results from some type of market distortion, such as tax. Because of the tax, the units between Qt and Qe are not sold. the value of these units to buyers is greater than the cost of producing them, so the tax prevents some mutually beneficial trades.
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