EC120 Chapter 7-Consumers, Producers, and the Efficiency of Markets Week 5
-Welfare Economics-the study of how the allocation of resources affect economic well-being
-The equilibrium of supply and demand in a market maximizes the total benefits received by buyers and
-We look at the benefits buyers receive from participating in a market
Willingness to Pay
-Each person has a limit to the amount that they are willing to pay for it
-Willingness to pay-maximum amount that a buyer will pay for a good
-Each buyer would be eager to buy the album at a price less than his willingness to pay, would refuse to
buy the album at a price more than his willingness to pay and would be indifferent about buying the
album at a price exactly equal to his willingness to pay.
-Consumer Surplus-a buyer’s willingness to pay minus the amount the buyer actually pays
Using the Demand Curve to Measure Consumer Surplus
-The following graph shows the demand curve that corresponds to the previous demand schedule
-At any quantity the price given by the demand curve and the buyers’ willingness to pay of the marginal
buyer - the buyer who would leave the market first if the price was any higher.
-It can also be used to measure consumer surplus
-The area below the demand curve and above the price measures the consumer surplus in a market – for
any demand curve.
-The total area below the demand curve and above the price is the sum of the consumer surplus of all
buyers in the market for a good or service EC120 Chapter 7-Consumers, Producers, and the Efficiency of Markets Week 5
How a Lower Price Raises Consumer Surplus
-Because buyers always want to pay less for the goods they buy, a lower price makes buyers of a good
What Does Consumer Surplus Measure?
-The goal in developing the concept of consumer surplus is to make normative judgements about the
desirability of market outcomes
-Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves
-It is a good measure of economic well being if policymakers want to respect the preferences of buyers
-From the standpoint of society, willingness to pay in this instance is not a good measure of teh buyer’s
benefit, and consumer surplus is not a good measure of economic well-being, because addicts are not
looking after their own best interests
-We consider the benefits sellers receive from participating in a market
Cost and the Willingness to Sell
-Each painter is willing to take the job if the price she they would receive exceeds her cost of doing the EC120 Chapter 7-Consumers, Producers, and the Efficiency of Markets Week 5
-Here the term cost should be interpreted as the painter’s opportunity cost.
-Each painted would be eager to sell their services at a price greater than their cost, and would refuse to
sell their services at a price less than their cost. At a price equal to her cost, they would be indifferent
about selling their services: they would be equally happy getting the job or walking away without
incurring the cost
-The price will start h