1 / 10

Welfare Economics

Welfare Economics. Chapter 7: Consumer Surplus. Welfare Economics. Welfare Economics is the study of whether a market allocation is socially desirable Market equilibrium maximizes total welfare for society unless there is a market failure (i.e. externalities, price fixing, etc…).

venus
Download Presentation

Welfare Economics

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. Welfare Economics Chapter 7:Consumer Surplus

  2. Welfare Economics Welfare Economics is the study of whether a market allocation is socially desirable • Market equilibrium maximizestotal welfare for society unless there is a market failure (i.e. externalities, price fixing, etc…) S = Marginal Cost (MC) D = Marginal Benefit (MB) MB = MC so Total Welfare is maximized

  3. Consumer surplus-measures welfare for the buyer Producer surplus-measures welfare for the seller Total Welfare =Consumer Surplus +Producer Surplus

  4. CONSUMER SURPLUS • Willingness to pay-the maximum price a consumer would pay • how much a consumer values a good/service • called the marginal benefit (MB) • Consumer Surplus-buyer’s willingness to pay minus price paid • CS=MB –Price Paid

  5. Consumers value goods differently The demand curve is essentially a marginal benefit curve Demand Schedule & the Demand Curve The market demand curve depicts the quantity buyers are willing to pay at each price

  6. John ’ s willingness to pay $100 Paul ’ s willingness to pay 80 George ’ s willingness to pay 70 Ringo ’ s willingness to pay 50 Demand or Marginal Benefit Demand Curve Price of Album 0 1 2 3 4 Quantity of Albums

  7. John ’ s consumer surplus ($30) Paul ’ s consumer surplus ($10) As Price ↓=> Consumer Surplus ↑ Total consumer surplus ($40) Demand Equilibrium Price = $70 Price of The area below the demand curve & above the price measures the consumer surplus in the market. Album $100 80 70 50 Quantity of 0 1 2 3 4 Albums

  8. A This triangle represents the “welfare” of all consumers at a market price of $100 Consumer Total Consumer Surplus = $10 ½ * 1 * 20 = $10 [½ b * h] Surplus 100 B C D1 = MB1 20 Equilibrium Price & Consumer Surplus Price 200 Quantity 0

  9. Consumer Surplus Handout • Please complete Consumer Surplus worksheet

  10. A Sample Problem 1) Calculate the initial consumer surplus at equilibrium price of $300 Price 2) Calculate the changein consumer surplus when price falls to $100 500 3) After the price decreases from $300 to $100 a) what gain is for old consumers(people who also bought when price = $300) b) what gain in consumer surplus is for new consumers E1 300 ----------------- -------------------- E2 ---------------------------------- 100 ----- D1 50 100 Quantity 0

More Related