CAS EC 101 Lecture Notes - Lecture 15: Economic Surplus, Demand Curve, Regional Policy Of The European Union
1 May 2018
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WELFARE ECONOMICS:
Objective 1: Overview
• Welfare – social wellbeing (ex: how well off is society from a certain policy?)
Objective 2: Consumer Surplus – a dollar measurement the benefit that buyers receive from a
good as the buyers themselves perceive it
• Formula: (the amount that buyers are willing to pay for a good) – (the amount they
actually pay for it)
o Essentially: (value to buyers) – (amount paid by buyers)
• Graphically (P1): analyzing a single price
o ABC = the area under the demand curve above the price line that shows what
consumers pay up until the quantity that shows what consumers actually buy
o Will always be a dollar amount
o
• Graphically (P1 to P2): when price decreases from P1 to P2
o ABC = initial consumer surplus (the area under the demand curve above the price
line that shows what consumers pay up until the quantity that shows what
consumers actually buy)
o BCDE = additional consumer surplus to initial consumers (results from the fact
that initial consumers get an additional surplus)
o CEF = consumer surplus to new consumers (the additional units sold)
o
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Objective 3: Producer Surplus – the amount that sellers receive for a good over and above the
minimum for which they are willing to sell the good
• Essentially, minimum for which firms are willing to sell the good is typically their
marginal cost (represented by their supply curve)
• Graphically (P1): analyzing a single price
o ABC = the area above the supply curve that shows the minimum for which firms
are willing to sell their good (aka: marginal cost)
o
• Graphically (P1 to P2): when price increases from P1 to P2
o ABC = initial producer surplus (the area above the supply curve that shows the
minimum for which firms are willing to sell their good)
o BCDE = additional producer surplus to initial producers (results from the fact that
there are more units produced)
o CEF = producer surplus to new consumers (the additional units sold)
o
Objective 4: Social Surplus (a dollar measurement of the total benefit to society)
• Formula: Social Surplus = Consumer Surplus + Producer Surplus
• Graphically:
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o Essentially, the area to the left of the equilibrium
o Important to distinguish between consumer surplus and producer surplus
Objective 5: Review
• Consumer Surplus = amount buyers are willing to pay for a good – amount buyers
actually pay for a good
• Producer Surplus = amount received by sellers – cost to sellers
• Social Surplus = value to buyers – amount paid by buyers
Objective 5: Efficiency v. Equity
• Efficiency – the property of a resource allocation of maximizing the total surplus
received by all members of society
• The Omniscient Planner
o
o Essentially the segment between the value placed on a good and the cost placed
on a good
▪ This will maximize social surplus
▪ ex: segment 1 – represents total social surplus received from the first unit
▪ ex: segment 2 – represents total social surplus received from the second
unit
o Where the supply and demand curves cross is where V(Q*) = C(Q*)
▪ Essentially where the value placed on a good is equal to the cost placed on
a good
o Question: why is any value past the equilibrium not ideal?
▪ The production of that unit means the cost of the good is greater than the
value of the good
• Pareto Efficiency (Pareto Optimality) – a situation in which nobody can be made better
off without making somebody else worse off
o Important to note that any market equilibrium will be pareto efficient
o This is a weak condition because it can apply to many situations
o This is a strong condition because without it significant resources will be wasted
• Equity – the fairness of the distribution of well-being among various buyers and sellers
Objective 6: Welfare Analysis of Price Controls
• Price Ceilings
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CAS EC 101 Full Course Notes
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Document Summary
Objective 1: overview: welfare social wellbeing (ex: how well off is society from a certain policy?) Objective 6: welfare analysis of price controls: price ceilings, remember that a binding price ceiling is set below the equilibrium price and results in a shortage (qd > qs) If the government does not buy the surplus: A + b + c + g + h. B + c + d + g + h. Objective 7: absolute advantage v. comparative advantage: absolute advantage higher productivity, comparative advantage lower marginal opportunity cost, in order to calculate this, we must first calculate marginal opportunity cost (moc) of each product. Involves two individuals/firms who are in a position to trade: based on comparative advantage rather than absolute advantage, ex: Laptops per worker year motorcycles per worker year. In eight hours, you can type 18 pages while your roommate can type 10 pages.
