1 / 80

Efficiency

Efficiency. Principles of Microeconomic Theory, ECO 284 John Eastwood CBA 213 523-7353 e-mail address: John.Eastwood@nau.edu. Learning Objectives. Distinguish between value and price Define consumer surplus Distinguish between cost and price Define producer surplus

tyler
Download Presentation

Efficiency

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Efficiency • Principles of Microeconomic Theory, ECO 284 • John Eastwood • CBA 213 • 523-7353 • e-mail address: John.Eastwood@nau.edu

  2. Learning Objectives • Distinguish between value and price • Define consumer surplus • Distinguish between cost and price • Define producer surplus • Explain why consumer surplus and producer surplus are the gains from trade

  3. Learning Objectives (cont.) • Explain why competitive markets move resources to their highest-valued uses • Explain the sources of inefficiency in our economy

  4. Learning Objectives • Distinguish between value and price • Define consumer surplus • Distinguish between cost and price • Define producer surplus • Explain why consumer surplus and producer surplus are the gains from trade

  5. Efficiency: A Refresher • According to economists, efficiency means the resources have been used to produce the goods and services that people value the most.

  6. Efficiency: A Refresher • Marginal benefit is the benefit that a person receives from consuming one more unit of a good or service • measured as the maximum amount that a person is willing to give up for one additional unit • Principle of decreasing marginal benefit • marginal benefit decreases as consumption increases

  7. Efficiency: A Refresher • Marginal cost is the opportunity cost of producing one more unit of a good or service. • measured as the value of the best alternative foregone • Principle of increasing marginal cost • marginal cost increases as the quantity produced increases

  8. The Efficient Quantity of Pizza 25 20 Marginal cost and marginal benefit (dollars worth of goods and services) 15 10 5 0 5 10 15 20 Quantity (thousands of pizzas per day)

  9. The Efficient Quantity of Pizza 25 MC 20 Marginal cost and marginal benefit (dollars worth of goods and services) 15 10 5 MB 0 5 10 15 20 Quantity (thousands of pizzas per day)

  10. The Efficient Quantity of Pizza Pizza valued more highly than it costs: Increase production 25 MC Pizza costs more than it is valued: Decrease production 20 Marginal cost and marginal benefit (dollars worth of goods and services) 15 10 5 MB 0 5 10 15 20 Quantity (thousands of pizzas per day)

  11. The Efficient Quantity of Pizza Efficient quantity of pizza 25 MC 20 Marginal cost and marginal benefit (dollars worth of goods and services) 15 10 5 MB 0 5 10 15 20 Quantity (thousands of pizzas per day)

  12. Learning Objectives • Distinguish between value and price • Define consumer surplus • Distinguish between cost and price • Define producer surplus • Explain why consumer surplus and producer surplus are the gains from trade

  13. Value, Price, and Consumer Surplus • What is meant by “Value”? • Value of an item is the same thing as its marginal benefit • Marginal benefit - the maximum price people are willing to pay for an additional unit • Willingness determines demand

  14. Demand, Willingness to Pay,and Marginal Benefit 25 Price determines quantity demanded 20 Price (dollars per pizza) 15 10 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  15. Demand, Willingness to Pay,and Marginal Benefit 25 Price determines quantity demanded 20 Price (dollars per pizza) 15 10 Quantity of pizzas demanded at $15 a pizza 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  16. Demand, Willingness to Pay,and Marginal Benefit 25 Quantity determines willingness to pay 20 Price (dollars per pizza) 15 10 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  17. Demand, Willingness to Pay,and Marginal Benefit 25 Quantity determines willingness to pay 20 Price (dollars per pizza) 15 Maximum price willingly paid for the 10,000th pizza 10 5 D=MB 0 5 10 15 20 Quantity (thousands of pizzas per day)

  18. Consumer Surplus • Consumer surplus is the value of a good minus the price paid for it. • if a person buys something for less than they are willing to pay for it, a consumer surplus exists

  19. A Consumer’s Demand and Consumer Surplus 2.50 Price (dollars per slice) 2.00 1.50 1.00 0.50 D 0 10 20 30 40 Quantity (slices of pizzas per week)

  20. A Consumer’s Demand and Consumer Surplus 2.50 Market price Price (dollars per slice) 2.00 1.50 1.00 0.50 D 0 10 20 30 40 Quantity (slices of pizzas per week)

  21. A Consumer’s Demand and Consumer Surplus 2.50 Market price Price (dollars per slice) 2.00 1.50 1.00 Amount paid 0.50 D 0 10 20 30 40 Quantity (slices of pizzas per week)

  22. A Consumer’s Demand and Consumer Surplus Lisa’s consumer surplus from the 10th pizza 2.50 Market price Price (dollars per slice) 2.00 1.50 1.00 Amount paid 0.50 D 0 10 20 30 40 Quantity (slices of pizzas per week)

  23. A Consumer’s Demand and Consumer Surplus Consumer surplus Lisa’s consumer surplus from the 10th pizza 2.50 Market price Price (dollars per slice) 2.00 1.50 1.00 Amount paid 0.50 D 0 10 20 30 40 Quantity (slices of pizzas per week)

  24. Demand Curves Measure Willingness-to-Pay • The Demand Price represents the value of the next unit to consumers. • The area under the demand curve to the left of a quantity, Q, equals the total value of that level of output to consumers. • It is the maximum amount they would be willing to pay for Q.

  25. Consumers’ Surplus • Consumers’ Surplus is the difference between consumers’ maximum willingness-to-pay and the amount they actually paid. • The amount actually paid equals TR=PQ. • Graphically, Consumers’ Surplus (CS) is the area under the demand curve above Pe.

  26. Computing CS • CS is the area under the demand curve above Pe =$10. • Area (of a right triangle) =(1/2)bh • CS= • CS=

  27. Computing CS • CS is the area under the demand curve above Pe =$10. • Area (of a right triangle) =(0.5)bh • CS=(0.5)10(10) • CS=50 $/day

  28. Learning Objectives • Distinguish between value and price • Define consumer surplus • Distinguish between cost and price • Define producer surplus • Explain why consumer surplus and producer surplus are the gains from trade

  29. Cost, Price, and Producer Surplus • Cost vs. Price • Cost is what the producer gives up. • Price is what the producer receives. • Marginal cost is the cost of producing one more unit.

  30. Supply, Minimum Supply-Price, and Marginal Cost S 25 Price determines quantity supplied. 20 Price (dollars per pizza) 15 10 5 0 50 100 150 200 Quantity (thousands of pizzas per day)

  31. Supply, Minimum Supply-Price, and Marginal Cost S 25 Price determines quantity supplied. 20 Price (dollars per pizza) 15 10 Quantity of pizzas supplied at $15 a pizza 5 0 50 100 150 200 Quantity (thousands of pizzas per day)

  32. Supply, Minimum Supply-Price, and Marginal Cost S 25 20 Price (dollars per pizza) Quantity determines minimum supply- price. 15 10 5 0 50 100 150 200 Quantity (thousands of pizzas per day)

  33. Supply, Minimum Supply-Price, and Marginal Cost S=MC 25 Minimum supply- price for 10,000th pizza 20 Price (dollars per pizza) Quantity determines minimum supply- price. 15 10 5 0 50 100 150 200 Quantity (thousands of pizzas per day)

  34. Learning Objectives • Distinguish between value and price • Define consumer surplus • Distinguish between cost and price • Define producer surplus • Explain why consumer surplus and producer surplus are the gains from trade

  35. Producer Surplus • Producer surplus is the value of a good minus the opportunity cost of producing it. • if a firm sells something for more that it costs to produce, a producer surplus exists

  36. A Producers Supplyand Producer Surplus S 25 20 Price (dollars per pizza) Price determines quantity supplied 15 10 5 0 50 100 150 200 Quantity (pizzas per day)

  37. A Producers Supplyand Producer Surplus S 25 Market price 20 Price (dollars per pizza) 15 10 5 0 50 100 150 200 Quantity (pizzas per day)

  38. A Producers Supplyand Producer Surplus Max’s producer surplus from the 50th pizza S 25 Market price 20 Price (dollars per pizza) 15 10 Cost of Production 5 0 50 100 150 200 Quantity (pizzas per day)

  39. A Producers Supplyand Producer Surplus Max’s producer surplus from the 50th pizza S 25 Market price 20 Price (dollars per pizza) Producer surplus 15 10 Cost of Production 5 0 50 100 150 200 Quantity (pizzas per day)

  40. A Producers Supplyand Producer Surplus S Producer surplus equals profit 25 Market price 20 Price (dollars per pizza) 15 10 Cost of Production 5 0 50 100 150 200 Quantity (pizzas per day)

  41. Supply Curves Measure Costs • Under competitive conditions, the supply curve represents the cost of producing the next unit.

  42. Producers’ Surplus • . . . is the difference between the amount producers receive, and the minimum amount they would have been willing to accept. • Producers receive TR =PQ. • Graphically, Producers’ Surplus (PS) is the area under the price line, and above Supply.

  43. Computing PS • Producers’ Surplus (PS) is the area under the Pe, and above Supply. • Area =(0.5)bh • PS= • PS= • CS+PS=

  44. Computing PS • Producers’ Surplus (PS) is the area under the Pe, and above Supply. • Area =(0.5)bh • PS=(0.5)10(5) • PS=25 $/day • CS+PS=75 $/day

  45. Learning Objectives • Distinguish between value and price • Define consumer surplus • Distinguish between cost and price • Define producer surplus • Explain why consumer surplus and producer surplus are the gains from trade

  46. Is the CompetitiveMarket Efficient? • Recall • Supply and demand will force the price toward the equilibrium price Question: Is this the efficient quantity of pizza?

  47. An Efficient Market for Pizza S Marginal cost-- opportunity cost --of pizza 25 20 Price (dollars per pizza) 15 Marginal benefit-- value--of pizza 10 5 Efficient quantity of pizzas D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  48. Is the CompetitiveMarket Efficient? • At Competitive Equilibrium • Resources are being used efficiently • The sum of consumer surplus and producer surplus is maximized

  49. An Efficient Market for Pizza S 25 20 Price (dollars per pizza) 15 10 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  50. An Efficient Market for Pizza S 25 20 Price (dollars per pizza) 15 10 Producer surplus 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

More Related