economics for managers gtu mba sem 1 chapter 07

7/31/2019 Economics For Managers GTU MBA Sem 1 Chapter 07

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Consumers,Producers, and the

Efficiency of Markets

Chapter 7

Author:

Sharif Memon


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Quiz1 Economics For Managers

Total Marks : 50 Time Duration : 80 Minutes

Q-1 An Economy is just a group of people interacting with oneanother as they go about their livesIn this context explain firstfour principles of economics (10 marks)

OR

Q-1 How Economy as a whole works? Explain this statement with thehelp of last three principles.

Q-2 Attempt the following (30 marks)

Draw Circularflow Diagram

During the 1990s, technological advance reduced the cost ofcomputer chips. How do you think this affected the market forcomputers? For computer software? Explain with graphs.

Draw Production Possibility frontier with Technology influence.Q-3 What is supply? Explain the determinants of supply with a supply

curve? (10 marks)OR

Q-3 What is Elasticity of Demand? Explain the determinants of price

elasticity?


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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 buyers side.

Producer surplus measures economic

welfare from the sellersside.


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Consumer Surplus

Willingness to pay is the maximum price

that a buyer is willing and able to pay for

a good.

It measures how much the buyer values

the good or service.

Consumer surplusis the amount a buyer

is willing to pay for a good minus the

amount the buyer actually pays for it.


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Consumer Surplus

The market demand curve depicts

the various quantities that buyerswould be willing and able to

purchase at different prices.


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Four Possible Buyers Willingness

to Pay...

Price Buyer QuantityDemanded

More than $100 None 0

$80 to $100 John 1

$70 to $80 John, Paul 2$50 to $70 John, Paul, George 3

$50 or less Ringo 4


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Measuring Consumer Surplus with

the Demand Curve...

Price ofAlbum

50

70

80

0

$100

1 2 3 4 Quantity of

Albums

Johns willingness to pay

Pauls willingness to pay

Georges willingness to pay

Ringos willingness to pay

Demand


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Consumer Surplus and Economic

Well-Being

Consumer surplus,the amount that

buyers are willing to pay for a goodminus 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 paid minus the cost of

production.

It measures the benefit to sellers

participating in a market.


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Producer Surplus and the

Supply CurveJust as consumer surplus is related to the

demand curve, producer surplus is

closely related to the supply curve.

At any quantity, the price given by the

supply curve shows the cost of the

marginal seller, the seller who wouldleave the market first if the price were

any lower.


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Supply Schedule for the Four

Possible Sellers...

Price Sellers QuantitySupplied

$900 or more Mary, Frida, Georgia,Grandma 4

$800 to $900 Frida, Georgia, Grandma 3

$600 to $800 Georgia, Grandma 2

$500 to $600 Grandma 1

Less than $500 None 0


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Supply Curve...

Quantity of

Houses Painted

Price ofHouse

Painting

500

800$900

0

600

1 2 3 4

Grandmas cost

Georgias cost

Fridas costMarys cost

Supply


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The area below the price and abovethe supply curve measures the

producer surplus in a market.


Supply Curve


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P2

Q2

How Price Affects Producer

Surplus...

Quantity

Price

0

Supply

Q1

P1

A

BCInitial

Producersurplus

Additional producersurplus to initialproducers

D EF

Producer surplus

to new producers


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Economic Well-Being and Total

Surplus

and

Consumer

Surplus=

Value to

buyers

_ Amount paid

by buyers

ProducerSurplus

=Amount receivedby sellers

_ Cost tosellers


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Market Efficiency

Market efficiencyis achieved whenthe allocation of resources

maximizes total surplus.


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Market Efficiency

In addition to market efficiency, a

social planner might also care aboutequitythe fairness of the

distribution of well-being among the

various buyers and sellers.


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Consumer and Producer Surplus in

the Market Equilibrium...

Price

Equilibriumprice

0 QuantityEquilibrium

quantity

A

Supply

C

B Demand

D

E

Producersurplus

Consumersurplus

economics for managers gtu mba sem 1 chapter 07

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