1. Market Efficiency vs. Efficiency Loss

2. Market Efficiency Basics
Consumer surplus
The amount a consumer is willing to pay for a good minus what he actually pays for it.
Cookie Monster may be willing to pay $100 for one cookie.
But, Cookie Monster is happy to find out that the price of a cookie is just $1.
So Cookie Monster’s consumer surplus per cookie is $99!

3. Market Efficiency Basics
Producer surplus
The amount a seller sold the item for minus what they were willing to sell it for
Best Buy is willing to sell a television as low as $500
A customer buys that same television for $600
Best Buy had a producer surplus of $100

4. Market Efficient Basics
Total surplus
consumer surplus + producer surplus
So, when do you think a market is most efficient…?
When total surplus is maximized!

5. Measuring surplus on a graph
Consumer surplus
The area below the demand curve and above the price
Producer surplus
The area above the supply curve and below the price

6. Consumer and Producer Surplus in the Market Equilibrium
Price A C B D E
Consumer
surplus
Demand
Supply
Total
Surplus
Can you label:
Consumer surplus
- Producer surplus
Total surplus
Equilibrium
price
quantity
Producer
surplus
Quantity

7. Efficiency Loss Also known as deadweight loss or welfare loss
Total surplus is NOT maximized
Resources and products are underutilized
Many causes
Government Regulations
Externalities
Monopoly pricing

8. Government Regulation

9. What do you think is the market price for renting an apartment in Plainfield?
What happens to the quantity of demand and supply after the price change?
List four outcomes that would most likely occur if the price was set there
Think like an economist!

10. Price Ceiling
Maximum price that can be legally charged for a good or service
It’s called “binding” if the ceiling price is set below market equilibrium
It’s “not binding” if it’s set above market equilibrium

12. Rent Control (Price ceiling)
Allows people to live in neighborhoods they could not afford
Causes a shortage of apartments
Causes bad quality apartments
Property value in surrounding area’s can decline
Causes deadweight loss!

13. What do you think the average wage is for a cashier at a Plainfield Meijer?
What happens to the quantity of demand and supply after the wage change?
List four outcomes that would most likely occur if the price was set there
Think like an economist!

14. Price Floors
Minimum price that is set that must be paid for a good or service
It is called “binding” if the floor price is set above market equilibrium
It’s “not binding” if it’s set below market equilibrium

16. Minimum Wage (price floor)
Minimum price that an employer can pay a worker for an hour of labor
Increases worker’s income
Can cause a surplus of workers
Younger people may not be hired for low skilled jobs
Many, many, many more outcomes

17. National & Illinois Minimum Wage
Is that enough or even needed?

18. We are not talking about us!
UTILITY
We are not talking about us!

19. Market Efficiency Basics
What do you think happens to the utility of this good after you consume more and more of it?
Utility
The amount of satisfaction or benefits one gets out of consuming a good.

20. Market Efficiency Basics
Diminishing marginal utility
There will be a decline in utility with each additional unit consumed
Holy pizza! My utility from each slice of pizza really started to decline….think I’ll just order a small pizza next time.

21. Market Efficiency Basics
Utility maximization rule
Maximize your utility with each dollar you spend
You do this by weighing your marginal utility per dollar spent
$1 Slice of Pizza
Total Utility
Marginal Utility 1
100 2
220
120 3
350
130 4
450 5
490 40 6
491