In this chapter, you will: Examine the link between buyers’ willingness to pay for a good and the demand curve, learn how to define and measure consumer surplus, examine the link between sellers’ costs of producing a good and the supply curve, learn how to define and measure producer surplus, see that the equilibrium of supply and demand maximizes total surplus in a market. | 3 SUPPLY AND DEMAND II: MARKETS AND WELFARE 7 Consumers, Producers, and the Efficiency of Markets REVISITING THE MARKET EQUILIBRIUM Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? Market equilibrium reflects the way markets allocate scarce resources. Whether the market allocation is desirable can be addressed by welfare economics. Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being. Buyers and sellers receive benefits from taking part in the market. The equilibrium in a market maximizes the total welfare of buyers and sellers. Welfare Economics Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product. Welfare Economics Consumer surplus measures economic welfare from the buyer’s side. Producer surplus measures economic welfare from the seller’s side. CONSUMER SURPLUS Willingness to pay is the . | 3 SUPPLY AND DEMAND II: MARKETS AND WELFARE 7 Consumers, Producers, and the Efficiency of Markets REVISITING THE MARKET EQUILIBRIUM Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? Market equilibrium reflects the way markets allocate scarce resources. Whether the market allocation is desirable can be addressed by welfare economics. Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being. Buyers and sellers receive benefits from taking part in the market. The equilibrium in a market maximizes the total welfare of buyers and sellers. Welfare Economics Equilibrium in the market results in maximum benefits, and therefore maximum total welfare for both the consumers and the producers of the product. Welfare Economics Consumer surplus measures economic welfare from the buyer’s side. Producer surplus measures economic welfare from the seller’s side. CONSUMER SURPLUS Willingness to pay is the maximum amount that a buyer will pay for a good. It measures how much the buyer values the good or service. CONSUMER SURPLUS Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it. Table 1 Four Possible Buyers’ Willingness to Pay Copyright©2004 South-Western CONSUMER SURPLUS The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices. The Demand Schedule and the Demand Curve Figure 1 The Demand Schedule and the Demand Curve Copyright©2003 Southwestern/Thomson Learning Price of Album 0 Quantity of Albums Demand 1 2 3 4 $100 John ’ s willingness to pay 80 Paul ’ s willingness to pay 70 George ’ s willingness to pay 50 Ringo ’ s willingness to pay Figure 2 Measuring Consumer Surplus with the Demand Curve Copyright©2003 Southwestern/Thomson Learning (a) Price = $80 Price of Album 50 70 80 0 $100 Demand 1 2 3 4 Quantity of Albums John ’ s consumer surplus ($20) Figure 2 .
