1. Greebes For Sale!

2. Each of you has been given either a card or a packet of “money”
Greebes For Sale!
Each of you has been given either a card or a packet of “money”

3. Greebes For Sale!
Those of you that have a card…congrats! You are in the Greebe business
Your card tells you how many Greebe’s you have for sale and what you are willing to sell them for in the market
You are not willing to go any lower on price than what is on your card!

4. Greebes For Sale!
Those of you that have money…congrats! You are in the market for a new greebe.
All the money you have in your possession right now is strictly for buying a greebe. You are willing to spend that much on one.
You are not able to spend any more than what you have right now…no trading money!

5. Our first step…find our equilibrium price/quantity!
Greebes for Sale!
Our first step…find our equilibrium price/quantity!

6. Greebes for Sale!
Price
Quantity of Greebes Supplied $1 $2 $3 $4 $5

7. Greebes for Sale!
Price
Quantity of Greebes Supplied $1 1 $2 $3 $4 $5

8. Greebes for Sale! Price Quantity of Greebes Supplied $1 1 $2 2 $3 $4$5

9. Greebes for Sale! Price Quantity of Greebes Supplied $1 1 $2 2 $3 3 $4$5

10. Greebes for Sale! Price Quantity of Greebes Supplied $1 1 $2 2 $3 3 $4$5

11. Greebes for Sale! Price Quantity of Greebes Supplied $1 1 $2 2 $3 3 $4$5 5

12. Greebes for Sale!
Assuming our supply curve is a straight line…let’s draw it on the board.

13. Greebes for Sale! Price Quantity of Greebes Supplied $1 1 $2 2 $3 3 $4$5 5

14. Now let’s look at demand!
Greebes for Sale!
Now let’s look at demand!

15. Greebes for Sale!
Price
Quantity of Greebes Demand
$10 $9 $8 $7 $6 $5

16. Greebes for Sale!
Price
Quantity of Greebes Demand
$10 $9 $8 $7 $6 $5

17. Greebes for Sale! Price Quantity of Greebes Demand $10 $9 1 $8 $7 $6$9 1 $8 $7 $6 $5

18. Greebes for Sale! Price Quantity of Greebes Demand $10 $9 1 $8 2 $7 $6$9 1 $8 2 $7 $6 $5

19. Greebes for Sale! Price Quantity of Greebes Demand $10 $9 1 $8 2 $7 3$9 1 $8 2 $7 3 $6 $5

20. Greebes for Sale! Price Quantity of Greebes Demand $10 $9 1 $8 2 $7 3$9 1 $8 2 $7 3 $6 4 $5

21. Greebes for Sale! Price Quantity of Greebes Demand $10 $9 1 $8 2 $7 3$9 1 $8 2 $7 3 $6 4 $5 5

22. Greebes for Sale!
Assuming our demand curve is a straight line…let’s draw it on the board as well!

23. Now let’s look at our equilibrium.
Greebes for Sale!
Now let’s look at our equilibrium.
We know the quantity supplied needs to equal the quantity demanded.

24. Greebes for Sale!
Quantity Demanded
Quantity Supplied $5 5

25. Greebes for Sale!
Our equilibrium price is $5! This is where there are 5 greebes supplied and 5 greebes demanded.

26. Now that we have that…let’s do some shopping.
Greebes for Sale!
Now that we have that…let’s do some shopping.

27. Greebes for Sale!
Let’s look at the buying side first. I’m going to call each of you up and you are going to put your $5 for your greebe in this pile. Your extra money goes in this pile.

28. Greebes for Sale!
What does this pile represent? It’s the extra money that consumers have left over that they were willing to spend on greebes but did not have to because the price was lower than what they were willing to pay.

29. We call this consumer surplus!
Greebes for Sale!
We call this consumer surplus!

30. How could we represent this amount on our graph?
Greebes for Sale!
How could we represent this amount on our graph?

31. Greebes for Sale!
Now let’s look at our producers! You will come up and take your $5 for your greebe. You may take back your original price on your card to your seat. You must put the extra in this pile here.

32. Greebes for Sale!
What does this pile represent? This is the extra money that went to the producers because they were willing to sell a greebe for less than the market price.

33. We call this producer surplus!
Greebes for Sale!
We call this producer surplus!

34. How could we represent this on our graph?
Greebes for Sale!
How could we represent this on our graph?

35. Assignment For Tonight
Read pages 138 – 147 in your book.
Be prepared to answer questions over the material tomorrow!

36. What is an example of a market where we would not care about consumer surplus or using it to analyze desirable outcomes?

37. Welfare Economics
Up until now, we’ve looked at what is
Now looking at bit more at what should be…

38. Use value to assess “willingness to pay” of a buyer
Consumer Surplus
Use value to assess “willingness to pay” of a buyer
What are you willing to spend on a good

39. What would you pay for?

40. Consumer Surplus If the price is:
Above what a person is willing to pay he/she will not buy it
At what a person is willing to pay he/she is indifferent
Just as happy buying the item as keeping the money
Below what a person is willing to pay he/she will happily buy it

41. When the price is below what a person is willing to pay he/she benefits in two ways:
The benefit of having the item
The benefit of having extra money left over from what you were prepared to pay for it
This extra money is consumer surplus!

42. Consumer Surplus
Consumer surplus is closely related to the demand curve
Each point on the curve is derived from the willingness to pay of buyers.

43. Consumer Surplus
At any quantity the price given by the curve shows the willingness to pay of the “marginal” buyer
This is the buyer that would leave the market first if the price were any higher!

44. Consumer Surplus
Because the demand curve shows willingness to pay, we use it to show consumer surplus!

45. Consumer Surplus When we have equilibrium
Consumer Surplus = area below demand curve and above price

46. Consumer Surplus
How can we increase consumer surplus?
LOWER PRICES!

47. Increasing Consumer Surplus

48. Consumer Surplus
So what is the point?!

49. Consumer Surplus
We use consumer surplus to analyze the desirability of market outcomes.

50. Consumer Surplus
If you want to represent the preferences of consumers: consumer surplus is a good measure of economic well-being.

51. Consumer Surplus
Sometimes might not care about consumer surplus.

52. Consumer Surplus
Drugs! A junkie might be quite thrilled that blue meth is priced less than what they are willing to pay for it…however, measuring this is not a good indicator of economic well being!

53. Producer Surplus
Need a new definition for cost: Looking at actual monetary costs and opportunity cost of lost opportunities.

54. Producer Surplus
Here cost is a measure of willingness to sell. This is the lowest price you would take for your good/service.

55. As a supplier you would be:
Happy to sell your good/service at a price higher than cost
Refuse to sell your good/service at a price lower than cost
Indifferent to selling your good/service at cost
Equally happy getting the job or walking away without paying the cost.

56. Producer Surplus
Looks at the amount a seller is paid minus the costs

57. Producer surplus is closely related to the supply curve At any quantity, price given on curve shows the cost of the marginal seller - Seller that would leave the market first if the price were any lower

58. Producer surplus is closely related to the supply curve At any quantity, price given on curve shows the cost of the marginal seller - Seller that would leave the market first if the price were any lower

59. Producer Surplus
Graphically = the area below price and above the supply curve

60. Producer Surplus How could we increase producer surplus?
Raise the price!

61. Producer Surplus
Producer Surplus grows for existing producers and we have new producers added in to the equation

62. Calculating Consumer and Producer Surplus
How could I calculate consumer and producer surplus?
½ b * h – area of a triangle!

63. Market Efficiency
Fundamental Question: Is the allocation of resources determined by free markets desirable?

64. Market Efficiency
Total Surplus = Consumer Surplus + Producer Surplus Or Total Surplus = Value to buyers – Amount paid by buyers + Amount received by sellers – Cost to sellers

65. Market Efficiency
Total Surplus = Value to buyers – Amount paid by buyers + Amount received by sellers – Cost to sellers The middle terms cancel out leaving: Total Surplus = Value to buyers – Costs to sellers

66. Market Efficiency
If we maximize total surplus = Efficiency

67. Market Efficiency
For us: Efficiency is all that matters!

68. Market Efficiency
What else do actual policy makers have to take into account? Equity We don’t talk about this because it is a more normative subject

69. Market Efficiency
What else do actual policy makers have to take into account? Equity We don’t talk about this because it is a more normative subject

70. Market Efficiency
So at equilibrium do we have maximized total surplus???

71. Market Efficiency
YES!
Equilibrium = Maximized Total Surplus = Efficiency

72. Market Efficiency
Three Reasons Why: 1. Free markets allocated the supply of goods to the buyers who value them most highly

73. Market Efficiency
Three Reasons Why: 2. Free markets allocate the demand for goods to the sellers who can produce at least cost

74. Market Efficiency
Three Reasons Why: 3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.