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Lecture Economics: Chapter 5 - Dean Karlan, Jonathan Morduch

Chapter 5 - Efficiency. In this chapter you will learn: Use willingness to pay and sell to determine supply and demand at a given price, define and calculate surpluses, define and identify efficiency, describe the distribution of benefits that results from a policy decision, define and calculate deadweight loss, explain why correcting a missing market can make everyone better off. | Chapter 5 Efficiency © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • Use willingness to pay and sell to determine supply and demand at a given price. • Define and calculate surpluses. • Define and identify efficiency. • Describe the distribution of benefits that results from a policy decision. • Define and calculate deadweight loss. • Explain why correcting a missing market can make everyone better off. © 2014 by McGraw‐Hill Education 2 Willingness to pay and sell • Consumers many times are willing to pay more than the market price. – A consumer is willing to purchase a good if the price is below their maximum willingness to pay. • Producers likewise are willing to sell for less than the market price. – A producer is willing to sell a good if the price is above their minimum willingness to sell. • Voluntary exchanges create value and can make everyone involved better off. © 2014 by McGraw‐Hill Education 3 1 Willingness to pay and the demand curve Maximum willingness to pay shapes the demand curve. Price ($) Price ($) 600 600 500 500 Bird watcher Each step represents a camera bought by the additional buyer who becomes interested at that price. 400 400 300 300 Amateur photographer 200 200 Real estate agent Journalist 100 Teacher 100 Demand 0 1 2 3 4 5 Potential buyers 0 Five potential buyers’ willingness to pay forms demand curve. 10 20 30 40 50 60 Quantity of cameras (millions) Many buyers’ willingness to pay forms demand curve. © 2014 by McGraw‐Hill Education 4 Willingness to sell and the supply curve Minimum willingness to sell shapes the supply curve. Price ($) Price ($) 600 600 500 400 Each step represents the additional camera sold by a seller who becomes interested as the price increases. 300 500 Supply Art teacher Sales rep (small company) Nature photographer 200 Sales rep (big company) 100 400 300 200 100 Collector 0 1 2 3 4 5 Potential .