Chapter Fourteen Consumer’s Surplus. Monetary Measures of Gains-to- Trade  You can buy as much gasoline as you wish at $1 per gallon once you enter the.

Slides:

Advertisements

Similar presentations

Economics Chapter 4 Section 1.

Advertisements

Chapter Twenty-Five Monopoly Behavior. How Should a Monopoly Price? u So far a monopoly has been thought of as a firm which has to sell its product at.

Chapter Twenty-Five Monopoly Behavior. How Should a Monopoly Price? u So far a monopoly has been thought of as a firm which has to sell its product at.

Consumer’s and Producer’s Surpluses

Chapter 16 Equilibrium.

Equilibrium. Market Equilibrium  A market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers.  An equilibrium.

Monetary Measures of Utility  How much is a gallon of gas worth to a person?  Expenditure at going price (“value in exchange”)  Value above price/expenditure?

Chapter 15 Market Demand. 2 From Individual to Market Demand Functions Think of an economy containing n consumers, denoted by i = 1, …,n. Consumer i’s.

Demand, elasticities, market equilibrium, revenue, deadweight loss (Course Micro-economics) Ch Varian Teachers: Jongeneel/Van Mouche.

Chapter Fourteen Consumer’s Surplus. Monetary Measures of Gains-to- Trade  Suppose you know you can buy as much gasoline as you choose at a given price.

© 2010 W. W. Norton & Company, Inc. 14 Consumer’s Surplus.

Welfare measurement: individual CS, CV, EV and PS

Chapter 14 Consumer’s Surplus

Molly W. Dahl Georgetown University Econ 101 – Spring 2009

Consumer Surplus. Monetary Measures of Gains-to- Trade  Basic idea of consumer surplus: We want a measure of how much a person is willing to pay for.

Modeling the Market Process: A Review of the Basics

Chapter Twenty-Five Monopoly Behavior. How Should a Monopoly Price? u So far a monopoly has been thought of as a firm which has to sell its product at.

Chapter Fourteen Consumer’s Surplus. Monetary Measures of Gains-to- Trade  You can buy as much gasoline as you wish at $1 per gallon once you enter the.

Consumer’s Surplus 消费者剩余.  In previous chapters  From underlying preference or utility function to consumer’s demand function  In practice,  From.

Chapter Fourteen Consumer’s Surplus. Monetary Measures of Gains-to- Trade  You can buy as much gasoline as you wish at $1 per gallon once you enter the.

The Welfare Analysis of Free Trade The fact that a nation unequivocally gains from international trade does not mean that all groups within the nation.

Chapter 6 Market Efficiency and Government Intervention.

Managerial Economics & Business Strategy

Chapter Fourteen Consumer’s Surplus. Monetary Measures of Gains-to- Trade  You can buy as much gasoline as you wish at $1 per litre once you enter the.

1 Surplus Measures 2 An Alternative View of the Demand Curve u An alternative interpretation of the demand curve is that it represents the consumer’s.

Welfare measures: CS, CV, EV and PS (Course Micro-economics) Ch 14 Varian Teachers: Jongeneel/Van Mouche.

Chapter Fifteen Market Demand. From Individual to Market Demand Functions  Think of an economy containing n consumers, denoted by i = 1, …,n.  Consumer.

Equilibrium Introduce supply Equilibrium The effect of taxes Who really “pays” a tax? The deadweight loss of a tax Pareto efficiency.

1 Chapter 6 From Demand to Welfare. Main Topics Dissecting the effects of a price change Measuring changes in consumer welfare using demand curves 2.

Figure 8.2 How a Competitive Firm Maximizes Profit

Chapter Nine Buying and Selling. u Trade involves exchange -- when something is bought something else must be sold. u What will be bought? What will be.

Chapter Nine Buying and Selling. u Trade involves exchange, so when something is bought something else must be sold. u What will be bought? What will.

From Individual Demand to Consumer Surplus Today: Deriving market demand from individual demand; using reservation prices to derive consumer surplus.

© 2008 Pearson Addison Wesley. All rights reserved Chapter Five Consumer Welfare and Policy Analysis.

Economic surplus Gains and losses with international trade: Economic Welfare.

The Welfare Analysis of Free Trade The fact that a nation unequivocally gains from international trade does not mean that all groups within the nation.

Welfare Economics Consumer and Producer Surplus. Consumer Surplus How much are you willing to pay for a pair of jeans? As an individual consumer, you.

Consumer and Producer Surplus Consumer and producer surplus are important concepts to use when discussing economic welfare. This presentation looks at.

Welfare economicsslide 1 Analysis of Competitive Markets In this section, we examine the social welfare implications of competitive markets. The approach.

Evaluating the Welfare Effects of Government Policy: CS & PS

ECON 6012 Cost Benefit Analysis Memorial University of Newfoundland

The Basic Theory Using Demand and Supply

Using Supply and Demand 4 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website,

1 Microeconomics, 2 nd Edition David Besanko and Ronald Braeutigam Chapter 12: Pricing to Capture Surplus Value Prepared by Katharine Rockett © 2006 John.

Chapter Nine Buying and Selling. u Trade involves exchange -- when something is bought something else must be sold. u What will be bought? What will be.

 Consumer welfare from a good is the benefit a consumer gets from consuming that good in excess of the cost of the good.  If you buy a good for exactly.

The Basic Theory Using Demand and Supply

© 2010 W. W. Norton & Company, Inc. 25 Monopoly Behavior.

Consumer’s and Producer’s Surplus Frank and Bernanke – Chapter 3

1 Topic 1(b): Review of Producer Theory (supply) Review of Supply. Three areas to cover on the supply side: i.Interpreting an individual producer’s supply.

1 Market Demand Molly W. Dahl Georgetown University Econ 101 – Spring 2009.

Modeling the Market Process: A Review of the Basics Chapter 2 © 2004 Thomson Learning/South-Western.

Chapter 5 Consumer surplus Household choice in input markets.

Chapter Nine Applying the Competitive Model. © 2009 Pearson Addison-Wesley. All rights reserved. 9-2 Topics  Consumer Welfare.  Producer Welfare. 

Chapter 14 Consumer’s Surplus How to estimate preferences or utility from demand A discrete good with quasilinear utility u(x,y)=v(x)+y where y is money.

Modeling the Market Process: A Review of the Basics Chapter 2 © 2007 Thomson Learning/South-WesternCallan and Thomas, Environmental Economics and Management,

AP Microeconomics Unit II: The Nature and Function of Product Markets 13-20% of AP Micro Exam Unit II Exam: October 16/17.

Chapter 25 Monopoly Behavior. How Should a Monopoly Price? So far a monopoly has been thought of as a firm which has to sell its product at the same price.

Chapter 2: A Review of Markets and Rational Behavior “…while the law [of competition] may be sometimes hard for the individual, it is best for the race,

Chapter 15 Market Demand.

15 Market Demand.

Chapter Fourteen Consumer’s Surplus.

14 Consumer’s Surplus.

Monopoly and Pricing.

Chapter 14 Consumer’s Surplus.

Chapter Fourteen Consumer’s Surplus.

Chapter 14 Consumer’s Surplus.

Monopoly and Pricing.

Chapter 9 Buying and Selling.

Chapter Fourteen Consumer’s Surplus.

Presentation transcript:

Chapter Fourteen Consumer’s Surplus

Monetary Measures of Gains-to- Trade  You can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market.  Q: What is the most you would pay to enter the market?

 A: You would pay up to the dollar value of the gains-to-trade you would enjoy once in the market.  How can such gains-to-trade be measured? Monetary Measures of Gains-to- Trade

 Three such measures are: Consumer’s Surplus Equivalent Variation, and Compensating Variation.  Only in one special circumstance do these three measures coincide. Monetary Measures of Gains-to- Trade

 Suppose gasoline can be bought only in lumps of one gallon.  Use r 1 to denote the most a single consumer would pay for a 1st gallon -- call this her reservation price for the 1st gallon.  r 1 is the dollar equivalent of the marginal utility of the 1st gallon. $ Equivalent Utility Gains

 Now that she has one gallon, use r 2 to denote the most she would pay for a 2nd gallon -- this is her reservation price for the 2nd gallon.  r 2 is the dollar equivalent of the marginal utility of the 2nd gallon. $ Equivalent Utility Gains

 Generally, if she already has n-1 gallons of gasoline then r n denotes the most she will pay for an nth gallon.  r n is the dollar equivalent of the marginal utility of the nth gallon. $ Equivalent Utility Gains

 r 1 + … + r n will therefore be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of $0.  So r 1 + … + r n - p G n will be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of $p G each. $ Equivalent Utility Gains

 A plot of r 1, r 2, …, r n, … against n is a reservation-price curve. This is not quite the same as the consumer’s demand curve for gasoline. $ Equivalent Utility Gains

r1r1 r2r2 r3r3 r4r4 r5r5 r6r6

 What is the monetary value of our consumer’s gain-to-trading in the gasoline market at a price of $p G ? $ Equivalent Utility Gains

r1r1 r2r2 r3r3 r4r4 r5r5 r6r6 pGpG $ value of net utility gains-to-trade

 Now suppose that gasoline is sold in half-gallon units.  r 1, r 2, …, r n, … denote the consumer’s reservation prices for successive half-gallons of gasoline.  Our consumer’s new reservation price curve is $ Equivalent Utility Gains

r1r1 r3r3 r5r5 r7r7 r9r9 r pGpG $ value of net utility gains-to-trade

 Finally, if gasoline can be purchased in any quantity then... $ Equivalent Utility Gains

Gasoline ($) Res. Prices pGpG Reservation Price Curve for Gasoline $ value of net utility gains-to-trade

 Unfortunately, estimating a consumer’s reservation-price curve is difficult,  so, as an approximation, the reservation-price curve is replaced with the consumer’s ordinary demand curve. $ Equivalent Utility Gains

 A consumer’s reservation-price curve is not quite the same as her ordinary demand curve. Why not?  A reservation-price curve describes sequentially the values of successive single units of a commodity.  An ordinary demand curve describes the most that would be paid for q units of a commodity purchased simultaneously. Consumer’s Surplus

 The difference between the consumer’s reservation-price and ordinary demand curves is due to income effects.  But, if the consumer’s utility function is quasilinear in income then there are no income effects and Consumer’s Surplus is an exact $ measure of gains-to-trade. Consumer’s Surplus

 The change to a consumer’s total utility due to a change to p 1 is approximately the change in her Consumer’s Surplus. Consumer’s Surplus

p1p1 CS before p 1 (x 1 )

Consumer’s Surplus p1p1 CS after p 1 (x 1 )

Consumer’s Surplus p1p1 Lost CS p 1 (x 1 ), inverse ordinary demand curve for commodity 1.

 Changes in a firm’s welfare can be measured in dollars much as for a consumer. Producer’s Surplus

y (output units) Output price (p) Marginal Cost

Producer’s Surplus y (output units) Output price (p) Marginal Cost Revenue =

Producer’s Surplus y (output units) Output price (p) Marginal Cost Variable Cost of producing y’ units is the sum of the marginal costs

Producer’s Surplus y (output units) Output price (p) Marginal Cost Variable Cost of producing y’ units is the sum of the marginal costs Revenue less VC is the Producer’s Surplus.