1. Equilibrium (cont’d)

2. So What Do Buyers Get Out of This?
Consumer surplus
Difference between what you are willing-to-pay and what you have to pay
Willingness-to-pay
Everything under the demand curve up to the last unit that you bought
What you had to pay
Average price paid x number of units purchased

3. Consumer Surplus Demand Curve is Also Marginal Value and Avg RevenueCS
Amount Paid
Total WTP =
CS + Amt Paid

4. What Do Sellers Get Out of This?
Producer Surplus
The difference between what they get paid (total revenues) and what it costs them
Total Revenues
> = Average Price x Quantity Purchased
Total Costs
> = Sum of Marginal Costs up to the amount supplied (QS)
Or = the area under the supply curve up to Qs

5. What is the Value of the Market
To Consumers = Consumer Surplus
To Producers = Producer Surplus
Value equals the sum of both CS and PS

6. Market Efficiency Evaluating the market equilibrium Market outcomes
Free markets allocate the supply of goods to the buyers who value them most highly
Measured by their willingness to pay
Free markets allocate the demand for goods to the sellers who can produce them at the least cost
Only produce if you are paid as much (or more) than product costs to make (MC)

7. Consumer and producer surplus in the market equilibrium7
Consumer and producer surplus in the market equilibrium
Price A
Supply
Demand D
Consumer
surplus
Equilibrium
price E
Equilibrium
quantity
Producer
surplus B C
Quantity
Total surplus—the sum of consumer and producer surplus—is the area between the supply and demand curves up to the equilibrium quantity

8. Market Efficiency Evaluating the market equilibrium Social planner
Cannot increase economic well-being by
Changing the allocation of consumption among buyers
Changing the allocation of production among sellers
Cannot rise total economic well-being by
Increasing or decreasing the quantity of the good
Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus

9. The efficiency of the equilibrium quantity8
The efficiency of the equilibrium quantity
Price
Supply
Demand
Cost to
sellers
Value to
buyers
Equilibrium
quantity
Value to
buyers
Cost to
sellers Q1 Q2
Quantity
Value to buyers is greater than cost to sellers
Value to buyers is less than cost to sellers
At quantities less than the equilibrium quantity, such as Q1, the value to buyers exceeds the cost to sellers. At quantities greater than the equilibrium quantity, such as Q2, the cost to sellers exceeds the value to buyers. Therefore, the market equilibrium maximizes the sum of producer and consumer surplus.

10. Market Efficiency Evaluating the market equilibrium
Equilibrium outcome
Efficient allocation of resources
Consumers:
Goods to those who value it most (MV >= P)
Suppliers
Goods produced by those with least costs/most efficient production (P>MC)
Efficient use of resources
Produce only goods whose value is >= cost of using the resources

11. Market Efficiency & Market Failure
In the world
Competition - far from perfect
Market power
A single buyer or seller (small group)
Control market prices
Markets are inefficient
Keeps the price and quantity away from the equilibrium of supply and demand

12. Market Efficiency & Market Failure
In the world
Decisions of buyers and sellers
Affect people who are not participants in the market at all
Externalities
Cause welfare in a market to depend on more than just the value to the buyers and the cost to the sellers
Inefficient equilibrium
From the standpoint of society as a whole

13. Market Efficiency & Market Failure
E.g.: market power and externalities
The inability of some unregulated markets to allocate resources efficiently
Occurs only in specific market types:
Monopoly
Possibly oligopoly (small number of producers)
Externalities (pollution, fish, natural resources)
Asymmetric information (financial markets)
Public policy
Can potentially remedy the problem
Increase economic efficiency