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Market for Aspirin in India

Market for Aspirin in India. “. Consumer Surplus. Consumer surplus is the maximum amount a buyer is willing to pay (WTP) for a good minus the amount he or she actually pays for it. My WTP for a Starbucks Venti. >. >. $2.25. Difference is my consumer surplus… makes me smile.

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Market for Aspirin in India

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  1. Market for Aspirin in India

  2. “ Consumer Surplus Consumer surplus is the maximum amount a buyer is willing to pay (WTP) for a good minus the amount he or she actually pays for it. My WTP for a Starbucks Venti > > $2.25 Difference is my consumer surplus… makes me smile

  3. “I blacked out constantly. My migraine problem got worse and I didn’t feel like eating a thing.” −Amosha, call centre worker Willingness to Pay for Aspirin Call Centre Workers (Rs per pack) Amosha 100 Aditya 80 Kali 70 Pranav 50

  4. Demand “Curve” of the Four Call Centre Workers Price of Aspirin (Rs) D 1 2 3 4 1 2 3 4 Quantity of Aspirin (#)

  5. Where is Consumer Surplus? Suppose PMKT = 60 R Price of Aspirin (Rs) Consumer Surplus = area under D and above Price Amosha’sConsumer Surplus= 40 R Aditva’s 20 R Kali’s10 R PMKT D 1 2 3 4 Quantity of Aspirin (#)

  6. Market for Chardonnays, 2002-2003 Price $2 wine may have drained grape glut S2002 August 17, 2003 P2002 D2002 Q2002 Quantity

  7. Market for Chardonnays, 2002-2003 Price $2 wine may have drained grape glut S2002 S2003 August 17, 2003 A P2002 B P2003=$2 A A + B ↑ CS due to ↓Price B D2002= D2003 Q2002 Q2003 Quantity

  8. Producer Surplus Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes). Producer Surplus = Price – WTA = $2.25 – $1.91 = $0.34 New Albany Starbucks Corporate Headquarters

  9. Producer Surplus Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes). real resources transfer

  10. Where is Producer Surplus? The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen “to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task.” Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna. S Height to Supply Curve = opp cost of catching that bluefin tuna Lobster Draggers Price of Bluefin Tuna ($ per lb) Stick Boats Seiners Quantity of Bluefin Tuna

  11. Where is Producer Surplus? The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen “to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task.” Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna. S2006 Price A P2007 A + B B D2007 P2006 A D2006 Q2006 Q2007 Quantity

  12. The Beauty of Competitive Markets CONSUMER SURPLUS: area under demand & above price over the range of output 2.5 billion Rs 1.25 billion Rs PRODUCER SURPLUS: area above supply & below price over the range of output

  13. The Beauty of (Perfectly) Competitive Markets (Perfectly) competitive markets are efficient, meaning that they maximize social surplus (= sum of consumer and producer surplus).

  14. “No Cure in Sight, As Aspirin Crisis Worsens” —Times of India What is the “disease?” Price Ceilings Imposed June 29, 2001 What are the symptoms? Shortages (Uncoated) Aspirin - 162.5 mg Clopidogrel- 75 mg 10's Strip/Blister 25 Source: National Pharmaceuticals Pricing Authority, Ministry of Chemicals and Fertilizers

  15. The Effect of Imposing a Price Ceiling on Aspirin PMAX Shortage s d Q Q

  16. The Effect of Imposing a Price Ceiling on Aspirin Deadweight Loss (DWL) = Loss in Social Surplus due to the Price Ceiling Consumer Surplus before Price Ceiling Producer Surplus before Price Ceiling PMAX s d Q Q

  17. Interpreting Deadweight Losses s Q to Q are MKT not produced despite benefit (WTP) > opp cost for each Q. Why? Net benefits = forgone DWL P MAX Quantity Consumed & Produced without the price ceiling Quantity Consumed & Produced under the price ceiling s Q

  18. Winners and Losers from Price Ceilings Producers are losers Indian Aspirin Market, 2000-2007 Price (R per pack) D2000=D2007 S2000=S2007 R S T U V T+U Loss in Producer Surplus Quantity (millions of packs per month)

  19. Winners and Losers from Price Ceilings Consumers can be either winners (T > S) or losers (T < S) Indian Aspirin Market, 2000-2007 Price (R per pack) D2000=D2007 S2000=S2007 R S T U V T – S Change in Consumer Surplus Quantity (millions of packs per month)

  20. Supply and Demand Price ($ per bag) Market for Brazilian Coffee, 1907-1908 S D P = 15 – 0.5 Q Quantity (millions of bags per year)

  21. Supply and Demand Why is demand downward sloping? Substitution Effect – As price falls, it makes sense to substitute coffee for tea. Income Effect—As price fall, incomes of coffee drinkers increase, inducing them to consume more coffee (and other stuff).

  22. Supply and Demand Price ($ per bag) Market for Brazilian Coffee, 1907-1908 S D P = 15 – 0.5 Q Quantity (millions of bags per year)

  23. Supply and Demand Price ($ per bag) Market for Brazilian Coffee, 1907-1908 S excess supply or surplus 1907 D excess demand or shortage P = 15 – 0.5 Q 1907 Quantity (millions of bags per year)

  24. Supply and Demand Welfare Properties of Equilibrium: If P ≠ Pe then some people can be made better off without anyone else being made worse off. Two important functions of price: Rationing Function Allocative Function—sends signals to direct resources to their highest value uses.

  25. Determinants of Supply and Demand Determinants of Demand: Income (normal versus inferior good) Prices of Complements & Substitutes Tastes Expectations Population Determinants of Supply: Technology Factor Prices Number of Suppliers Expectations Weather

  26. New York Times, August 10, 1908 Brazilian Coffee Law: Price Ceiling of $10 per bag

  27. Supply and Demand Price ($ per bag) Market for Brazilian Coffee, 1907-1908 S PMin price floor D 1907 Quantity (millions of bags per year)

  28. Supply and Demand Price ($ per bag) Market for Brazilian Coffee, 1907-1908 S new trees S1913 PMin price floor D 1907 Quantity (millions of bags per year)

  29. Along with the price floor, Brazil also “imposed a prohibitory tax on new trees.” The New York Times, Sep 13, 1908 Suppose the tax is imposed on the sellers of trees

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