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Lecture 6

ECON 20A Lecture 6: Lecture 6

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William Branch

Lecture 6 I. Main Idea a. The welfare of consumers and firms are maximized in a market equilibrium II. Consumer Surplus a. Every consumer has a maximum amount willing to pay for a good b. Consumer surplus difference between willingness to pay and amount paid c. Example: A Beatles record and 4 buyers. i. Price = 75 ii. Willingness to pay: John=100, Paul=80, George=70, Ringo=50 iii. Surplus is the price between 75 and the willingness to pay 1. John= 10075 = 25 2. Paul= 8075 = 5 3. George = 0 4. Ringo = 0 iv. Total consumer surplus = 30 = 25(John) + 5 (Paul) d. More generally, consumer surplus is area between the demand curve and market price (underneath the demand curve and above the market price) e. When Price Decreases i. The existing buyers bought up to the quantity, so they gain because the price that they pay is lower. The area between the two market prices is the gain to existing buyers ii. The triangle of new buyers that enter the market at the lower price that is the new additional surplus III. Producer Surplus a. Each producer has a maximum willingness to sell which is their opportunity cost (actual costs + foregone costs) b. Producer surplus: difference between the price and the maximum willingness to sell (amount a seller is paid minus the cost of production) c. Example: market for coconuts with 3 producers i. Price = 4 ii. Willingness to sell: Tom=5, Rob=3, Wilson=1 iii. Surplus is price between willingness to sell and actual price 1. Tom = 0 2. Rob= 43=1 3. Wilson=41=3 iv. Total producer surplus = 3(Wilson) + 1(Rob) = 4 d. More generally, producer surplus is the area below the market price and above the supply curve. IV. Market Efficiency a. Economic Wellbeing (Welfare) consumer surplus + producer surplus = total surplus b. Previously i. Consumer surplus = willingness to pay amount paid ii. Producer surplus = amount received cost to sellers
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