market efficiency vs. efficiency loss. market efficiency basics consumer surplus – the amount a...
TRANSCRIPT
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!
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
Market Efficient Basics
• Total surplus– consumer surplus + producer surplus
• So, when do you think a market is most efficient…?
When total surplus is maximized!
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
Consumer and Producer Surplus in the Market Equilibrium
Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
Can you label:-Consumer surplus- Producer surplus- Total surplus
Total Surplus
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
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!
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
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!
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!
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
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
National & Illinois Minimum Wage
• National = $7.25• Illinois = $8.25• Is that enough or even needed?
Market Efficiency Basics
• Utility– The amount of satisfaction or benefits one gets
out of consuming a good.
What do you think happens to the utility of this good after you consume more
and more of it?
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.