ECON 1 Lecture Notes - Lecture 6: Economic Surplus, Demand Curve
#6 Thursday 2/1 (Ch.7 Efficiency of Markets and Welfare)
Today
Free markets are generally īthe most efficientī way to organize an economy:
ā The goods are consumed by the buyers who īvalue them most highlyī.
ā The goods are produced by the producers with the īlowest costsī.
ā There are times when the market fails and the government is needed to sep in
Willingness to Pay
āWillingness to payī measures how much a buyer values a good = maximum amount a buyer will pay
for it
ā In a free market, īthe consumers with the highest WTP obtain the good
ā Why shouldnāt everyone have access to the good? Because goods are scarce and there are trade-offs
so the question is how do you allocate limited resources. When you let the economy work, the
consumers
Example: WTP for iPhone
WTP
ī
($)
Anthony
250
Chad
175
Flea
300
John
125
Clicker Question
Qī: If price is $200, what is market Demand for iPhones?
A: When īP
ī
= $200, only Anthony & Flea buy it ā Qīdī = 2
WTP and the Demand Curve
Consumer Surplus
Consumer surplus īmeasures the buyersā gains from participating in the market
It is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP - īP
Intuition
ā Fleaās WTP = 300
ā If īP
ī
= $260 ā Fleaās CS = #300 - 260 = $40
ā This measures īhow much Flea benefitsī from buying her iPhone
How to Visualize CS
If īP
ī
= 260
Fleaās CS = $300 - $260 = $40
If īP
ī
= $220
Fleaās CS = $300 - $220 = ī$80
Anthonyās CS = $250 - $220 = ī$30
Total CS = ī$110
Document Summary
#6 thursday 2/1 (ch. 7 efficiency of markets and welfare) Free markets are generally the most efficient way to organize an economy: The goods are consumed by the buyers who value them most highly . The goods are produced by the producers with the lowest costs . There are times when the market fails and the government is needed to sep in. Willingness to pay measures how much a buyer values a good = maximum amount a buyer will pay. In a free market, the consumers with the highest wtp obtain the good. Because goods are scarce and there are trade-offs so the question is how do you allocate limited resources. When you let the economy work, the consumers. A: when p = , only anthony & flea buy it q d = 2. Consumer surplus measures the buyers" gains from participating in the market.