demand & suppaly ppt mba

8/2/2019 Demand & Suppaly Ppt Mba

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SUPPLY AND DEMAND


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7Consumers, Producers, and the Efficiency ofMarkets


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REVISITING THE MARKETEQUILIBRIUM

Do the equilibrium price and quantity maximizethe 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 economicsis the study of how theallocation ofresources affects economic well-being.

Buyers and sellers receive benefits from takingpart 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 maximumbenefits, and therefore maximum total welfarefor both the consumers and the producers of

the product.


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Welfare Economics

Consumer surplus measures economicwelfare from the buyers side.

Producer surplus measures economic welfare

from the sellersside.


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CONSUMER SURPLUS

Willingness to payis the maximum amountthat 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 surplusis the buyers willingness topay for a good minus the amount the buyeractually pays for it.


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Table 1 Four Possible Buyers Willingness to Pay

Copyright2004 South-Western


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CONSUMER SURPLUS

The market demand curve depicts the variousquantities that buyers would be willing andable to purchase at different prices.


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The Demand Schedule and theDemand Curve


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Figure 1 The Demand Schedule and the Demand Curve

Copyright2003 Southwestern/Thomson Learning

Price ofAlbum

0 Quantity ofAlbums

Demand

1 2 3 4

$100 Johns willingness to pay

80 Pauls willingness to pay70 Georges willingness to pay

50 Ringos willingness to pay


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Figure 2 Measuring Consumer Surplus with the DemandCurve


(a) Price = $80Price of

Album

507080

0

$100

Demand

1 2 3 4 Quantity ofAlbums

Johns consumer surplus ($20)


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Figure 2 Measuring Consumer Surplus with the DemandCurve


(b) Price = $70Price of

Album

50

7080

0

$100

Demand1 2 3 4

Totalconsumersurplus ($40)

Quantity ofAlbums

Johns consumer surplus ($30)

Pauls consumersurplus ($10)


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Using the Demand Curve to Measure ConsumerSurplus

The area below the demand curve and abovethe price measures the consumer surplus inthe market.


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Figure 3 How the Price Affects Consumer Surplus


Consumersurplus

Quantity

(a) Consumer Surplus at Price PPrice

0

Demand

P1

Q1

B

A

C


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Figure 3 How the Price Affects Consumer Surplus


Initialconsumer

surplus

Quantity

(b) Consumer Surplus at Price PPrice

0

Demand

A

B C

D E F

P1

Q1

P2

Q2

Consumer surplusto new consumers

Additional consumersurplus to initial

consumers


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What Does Consumer Surplus Measure?

Consumer surplus, the amount that buyers arewilling to pay for a good minus the amountthey actually pay for it, measures the benefit

that buyers receive from a good as the buyersthemselves perceive it.


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PRODUCER SURPLUS

Producer surplusis the amount a seller is paidfor a good minus the sellers cost.

It measures the benefit to sellers participating

in a market.


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Table 2 The Costs of Four Possible Sellers

Copyright2004 South-Western


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Using the Supply Curve to Measure ProducerSurplus

Just as consumer surplus is related to thedemand curve, producer surplus is closelyrelated to the supply curve.


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The Supply Schedule and theSupply Curve


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Figure 4 The Supply Schedule and the Supply Curve


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Using the Supply Curve to Measure ProducerSurplus

The area below the price and above thesupply curve measures the producer surplus ina market.

Figure 5 Measuring Producer Surplus with the Supply


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Figure 5 Measuring Producer Surplus with the SupplyCurve


Quantity ofHouses Painted

Price ofHousePainting

500

800

$900

0

600

1 2 3 4

(a) Price = $600

Supply

Grandmas producersurplus ($100)

Figure 5 Measuring Producer Surplus with the Supply


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Figure 5 Measuring Producer Surplus with the SupplyCurve


Quantity ofHouses Painted

Price ofHousePainting

500

800$900

0

600

1 2 3 4

(b) Price = $800

Georgias producersurplus ($200)

Totalproducersurplus ($500)

Grandmas producersurplus ($300)

Supply


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Figure 6 How the Price Affects Producer Surplus


Producersurplus

Quantity

(a) Producer Surplus at Price PPrice

0

Supply

B

A

C

Q1

P1


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Figure 6 How the Price Affects Producer Surplus


Quantity

(b) Producer Surplus at Price PPrice

0

P1 B C

Supply

A

Initialproducersurplus

Q1

P2

Q2

Producer surplusto new producers

Additional producersurplus to initialproducers

D E F


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MARKET EFFICIENCY

Consumer surplus and producer surplus maybe used to address the following question:

Is the allocation of resources determined by freemarkets in any way desirable?


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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

or

Total surplus

= Value to buyers Cost to sellers


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MARKET EFFICIENCY

Efficiencyis the property of a resourceallocation of maximizing the total surplusreceived by all members of society.


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MARKET EFFICIENCY

In addition to market efficiency, a socialplanner might also care about equity thefairness of the distribution of well-being among

the various buyers and sellers.

Figure 7 Consumer and Producer Surplus in the Market


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Figure 7 Consumer and Producer Surplus in the MarketEquilibrium


Producersurplus

Consumersurplus

Price

0 Quantity

Equilibriumprice

Equilibriumquantity

Supply

Demand

A

CB

D

E


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MARKET EFFICIENCY

Three Insights Concerning Market Outcomes

Free markets allocate the supply of goods to thebuyers 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 producersurplus.

Fi 8 Th Effi i f th E ilib i Q tit


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Figure 8 The Efficiency of the Equilibrium Quantity


Quantity

Price

0

Supply

Demand

Costto

sellers

Costto

sellers

Valueto

buyers

Valueto

buyers

Value to buyers is greaterthan cost to sellers. Value to buyers is lessthan cost to sellers.

Equilibriumquantity


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Evaluating the Market Equilibrium

Because the equilibrium outcome is anefficient allocation of resources, the socialplanner 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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Market Power

If a market system is not perfectly competitive,market powermay result.

Market power is the ability to influence prices.Market power can cause markets to be inefficient

because it keeps price and quantity from theequilibrium of supply and demand.


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Externalities

created when a market outcome affectsindividuals 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 thesellers.

When buyers and sellers do not takeexternalities into account when deciding howmuch to consume and produce, theequilibrium in the market can be inefficient.


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Summary

Consumer surplus equals buyers willingness

to pay for a good minus the amount theyactually pay for it.

Consumer surplus measures the benefitbuyers get from participating in a market.

Consumer surplus can be computed by finding

the area below the demand curve and abovethe price.


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Summary

Producer surplus equals the amount sellersreceive for their goods minus their costs ofproduction.

Producer surplus measures the benefit sellersget from participating in a market.

Producer surplus can be computed by finding

the area below the price and above the supplycurve.


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Summary

An allocation of resources that maximizes thesum of consumer and producer surplus is saidto be efficient.

Policymakers are often concerned with theefficiency, as well as the equity, of economicoutcomes.


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Summary

The equilibrium of demand and supplymaximizes the sum of consumer and producersurplus.

This is as if the invisible hand of themarketplace leads buyers and sellers toallocate resources efficiently.

Markets do not allocate resources efficiently inthe presence of market failures.

demand & suppaly ppt mba

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