Examine link b/w buyer's willingness to pay for a good and the demand curve, how to define and measure
consumer surplus, examine link b/w sellers' cost of producing a good and the supply curve, how to define
Chapter 7 Consumers, Producers, And the Efficiency of Markets
Welfare Economics: Study of how the allocation of resources affects economic wellbeing.
first being by examining benefits that buyers and sellers receive for
taking part in a market.
Then how society can make these benefits as large as possible
therefore: The equilibrium of supply and demand in a market maximizes
the total benefits received by buyers and sellers.
Principles: Markets are usually a good way of organizing economic activity: welfare economics explains
Turkey is not to high not to low in price: buyers: always want less price, whereas sellers want more money
in the price
the price that balances the supply and demand for turkey is the best one because it maximizes the
total welfare of turkey consumers and buyers.
Benefits buyers receive from participating in a market.
Willingness to Pay
Selling a CD: 4 people want it for auction.
Willingness to pay: maximum amount that a buyer will pay for a good, measures how much buyer values
Each buyer would love to buy the CD less than his willingness to pay, and refuse above his w.t., and
indifferent to the price w.t.p.
John gets CD for $80 instead of $100 he out for= John receives CONSUMER SURPLUS of $20.
Consumer Surplus: A buyer's willingness to pay minus the amount the buyer actually pays.
measures benefit to buyers of participating in a market.
Using Demand Curve To Measure Consumer Surplus
demand is derived from willingness to pay
Height in demand curve and willingness to pay is related on the graph.
At any quantity, the price given by the demand curve shows the willingness to pay of the marginal buyer,
the buyer who would leave the market first if the price was any higher. ex:
Buyer Willingness To Pay
Price above 100 dollars= the quantity demanded in the market is 0 b/c no buyer is willing to pay that
much. If the price is b/w $80 and $100=quantity demand is 1 and so on.
At quantity of 4 albums, the demand curve has a height o $50, the price that Ringo (the marginal buyer) is
willing to pay for an album. At a quantity of 3 albums, the demand curve has a height of $70, the price
that George (now the marginal buyer) is willing to pay.
On the graph: The area below the demand curve and above the prices measures the consumer surplus in a
market=the height of the demand curve measures the value buyers place on good.
Difference b/w willingness to pay and