1、,Consumers, Producers, and the Efficiency of Markets,Chapter 7,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to: Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-677

2、7.,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 is determined by welfare economics.,Welfare Economics,Welfare

3、 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 be

4、nefits, and therefore maximum total welfare for both the consumers and the producers of the product.,Welfare Economics,Consumer surplus measures economic welfare from the buyers side. Producer surplus measures economic welfare from the sellers side.,Consumer Surplus,Willingness to pay is the maximum

5、 price that a buyer is willing and able to pay for a good. It measures how much the buyer values the good or service.,Consumer Surplus,Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.,Four Possible Buyers Willingness to Pay.,Consume

6、r Surplus,The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices.,Four Possible Buyers Willingness to Pay.,Measuring Consumer Surplus with the Demand Curve.,Price of Album,50,70,80,0,$100,1,2,3,4,Quantity of Albums,Measuring Consu

7、mer Surplus with the Demand Curve.,Price of Album,50,70,80,0,$100,1,2,3,4,Quantity of Albums,Demand,Price = $80,Measuring Consumer Surplus with the Demand Curve.,Price of Album,50,70,80,0,$100,1,2,3,4,Quantity of Albums,Demand,Price = $70,Measuring Consumer Surplus with the Demand Curve,The area bel

8、ow the demand curve and above the price measures the consumer surplus in the market.,How the Price Affects Consumer Surplus.,Quantity,Price,0,Demand,Copyright 2001 by Harcourt, Inc. All rights reserved,Initial consumer surplus,Consumer Surplus and Economic Well-Being,Consumer surplus, the amount tha

9、t buyers are willing to pay for a good minus the amount they actually pay for it, measures the benefit that buyers receive from a good as the buyers themselves perceive it.,Producer Surplus,Producer surplus is the amount a seller is paid minus the cost of production. It measures the benefit to selle

10、rs participating in a market.,The Costs of Four Possible Sellers.,Producer Surplus and the Supply Curve,Just as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve. At any quantity, the price given by the supply curve shows the cost of the margina

11、l seller, the seller who would leave the market first if the price were any lower.,Supply Schedule for the Four Possible Sellers.,Producer Surplus and the Supply Curve.,Quantity of Houses Painted,Price of House Painting,500,800,$900,0,600,1,2,3,4,Supply,The area below the price and above the supply

12、curve measures the producer surplus in a market.,Producer Surplus and the Supply Curve,Measuring Producer Surplus with the Supply Curve.,Quantity of Houses Painted,Price of House Painting,500,800,$900,0,600,1,2,3,4,Supply,Price = $600,Measuring Producer Surplus with the Supply Curve.,Quantity of Hou

13、ses Painted,Price of House Painting,500,800,$900,0,600,1,2,3,4,Supply,Price = $800,How Price Affects Producer Surplus.,Quantity,Price,0,Supply,Initial Producer surplus,Market Efficiency,Consumer surplus and producer surplus may be used to address the following question: Is the allocation of resource

14、s determined by free markets in any way desirable?,Economic Well-Being and Total Surplus,and,Economic Well-Being and Total Surplus,or,Market Efficiency,Market efficiency is achieved when the allocation of resources maximizes total surplus.,Market Efficiency,In addition to market efficiency, a social

15、 planner might also care about equity the fairness of the distribution of well-being among the various buyers and sellers.,Evaluating the Market Equilibrium.,Price,Equilibrium price,0,Quantity,Equilibrium quantity,A,Supply,C,B,Demand,D,E,Consumer and Producer Surplus in the Market Equilibrium.,Price

16、,Equilibrium price,0,Quantity,Equilibrium quantity,A,Supply,C,B,Demand,D,E,Producer surplus,Consumer surplus,Three Insights Concerning Market Outcomes,Free markets allocate the supply of goods to the buyers who value them most highly. Free markets allocate the demand for goods to the sellers who can

17、 produce them at least cost. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus.,Price,0,Quantity,Equilibrium quantity,Supply,Demand,Cost to sellers,Value to buyers,Value to buyers,Cost to sellers,Value to buyers is greater than cost to sellers.,Value

18、to buyers is less than cost to sellers.,The Efficiency of the Equilibrium Quantity,The Efficiency of the Equilibrium Quantity,Because the equilibrium outcome is an efficient allocation of resources, the social planner can leave the market outcome as he/she finds it. This policy of leaving well enoug

19、h alone goes by the French expression laissez faire.,Market Power,If a market system is not perfectly competitive, market power may result. Market power is the ability to influence prices. Market power can cause markets to be inefficient because it keeps price and quantity from the equilibrium of su

20、pply and demand.,Externalities,Externalities are created when a market outcome affects individuals other than buyers and sellers in that market. Externalities cause welfare in a market todepend on more than just the value to the buyers and cost to the sellers. When buyers and sellers do not take ext

21、ernalities into account when deciding how much to consume and produce, the equilibrium in the market can be inefficient.,Summary,Consumer surplus measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the

22、price.,Summary,Producer surplus measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.,Summary,The equilibrium of demand and supply maximizes the sum of consumer and producer surplus. This is a

23、s if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. Markets do not allocate resources efficiently in the presence of market failures.,Summary,An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient.

24、 Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.,Measuring Consumer Surplus with the Demand Curve.,Measuring Consumer Surplus with the Demand Curve.,Measuring Consumer Surplus with the Demand Curve.,How the Price Affects Consumer Surplus.,Producer S

25、urplus and the Supply Curve.,Measuring Producer Surplus with the Supply Curve.,Measuring Producer Surplus with the Supply Curve.,How Price Affects Producer Surplus.,Evaluating the Market Equilibrium.,Consumer and Producer Surplus in the Market Equilibrium.,The Efficiency of the Equilibrium Quantity,

26、Application:The Costs of Taxation,Chapter 8,Copyright 2001 by Harcourt, Inc.All rights reserved. Requests for permission to make copies of any part of thework should be mailed to: Permissions Department, Harcourt College Publishers,6277 Sea Harbor Drive, Orlando, Florida 32887-6777.,The Costs of Tax

27、ation,How do taxes affect the economic well-being of market participants?,The Costs of Taxation,It does not matter whether a tax on a good is levied on buyers or sellers of the goodthe price paid by buyers rises, and the price received by sellers falls.,The Effects of a Tax.,Price,0,Quantity,Supply,

28、Demand,The Effects of a Tax,A tax places a wedge between the price buyers pay and the price sellers receive. Because of this tax wedge, the quantity sold falls below the level that would be sold without a tax. The size of the market for that good shrinks.,Tax Revenue,T = the size of the tax,Q = the

29、quantity of the good sold,TQ = the governments tax revenue,Tax Revenue.,Price,0,Quantity,Quantity without tax,Supply,Demand,Price sellers receive,Quantity with tax,Price buyers pay,How a Tax Affects Welfare.,Quantity,0,Price,Demand,Supply,Q1,Q2,Tax reduces consumer surplus by (B+C) and producer surp

30、lus by (D+E),Tax revenue = (B+D),Deadweight Loss = (C+E),Changes in Welfare from a Tax,Without Tax,With Tax,Change,Consumer Surplus,A + B + C,A,- (B + C),Producer Surplus,D + E + F,F,- (D + E),Tax Revenue,none,B + D,+ (B + D),Total Surplus,A + B + C + D + E + F,A + B + D + F,- (C + E ),The area C+E

31、shows the fall in total surplus and is the deadweight loss of the tax.,How a Tax Affects Welfare,The change in total welfare includes: The change in consumer surplus, The change in producer surplus, The change in tax revenue. The losses to buyers and sellers exceed the revenue raised by the governme

32、nt. This fall in total surplus is called the deadweight loss.,Deadweight Losses and the Gains from Trade,Taxes cause deadweight losses because they prevent buyers and sellers from realizing some of the gains from trade.,The Deadweight Loss.,Quantity,0,Price,Demand,Supply,Q1,PB,Price = P1 without tax

33、,PS,Q2,Determinants of Deadweight Loss,What determines whether the deadweight loss from a tax is large or small? The magnitude of the deadweight loss depends on how much the quantity supplied and quantity demanded respond to changes in the price. That, in turn, depends on the price elasticities of s

34、upply and demand.,Tax Distortions and Elasticities.,Quantity,Price,Demand,Supply,0,(a) Inelastic Supply,Tax Distortions and Elasticities.,Quantity,Price,Demand,Supply,0,(b) Elastic Supply,Tax Distortions and Elasticities.,Quantity,Price,Demand,Supply,0,(c) Inelastic Demand,Tax Distortions and Elasti

35、cities.,Quantity,Price,Demand,Supply,0,(d) Elastic Demand,Determinants of Deadweight Loss,The greater the elasticities of demand and supply: the larger will be the decline in equilibrium quantity and, the greater the deadweight loss of a tax.,The Deadweight Loss Debate,Some economists argue that lab

36、or taxes are highly distorting and believe that labor supply is more elastic.,The Deadweight Loss Debate,Some examples of workers who may respond more to incentives: Workers who can adjust the number of hours they work Families with second earners Elderly who can choose when to retire Workers in the

37、 underground economy (i.e. those engaging in illegal activity),Deadweight Loss and Tax Revenue as Taxes Vary,With each increase in the tax rate, the deadweight loss of the tax rises even more rapidly than the size of the tax.,Deadweight Loss and Tax Revenue.,PB,Quantity,Q2,0,Price,Q1,Demand,Supply,P

38、S,(a) Small Tax,Demand,Supply,PB,Quantity,Q2,0,Price,Q1,PS,Deadweight Loss and Tax Revenue.,(b) Medium Tax,PB,Quantity,Q2,0,Price,Q1,Demand,Supply,PS,Deadweight Loss and Tax Revenue.,(c) Large Tax,Deadweight Loss and Tax Revenue,For the small tax, tax revenue is small. As the size of the tax rises,

39、tax revenue grows. But as the size of the tax continues to rise, tax revenue falls because the higher tax reduces the size of the market.,Deadweight Loss and Tax Revenue Vary with the Size of the Tax.,(a) Deadweight Loss,Deadweight Loss,0,Tax Size,Deadweight Loss and Tax Revenue Vary with the Size o

40、f the Tax.,(b) Revenue (the Laffer curve),Tax Revenue,0,Tax Size,Deadweight Loss and Tax Revenue Vary with the Size of the Tax,As the size of a tax increases, its deadweight loss quickly gets larger. By contrast, tax revenue first rises with the size of a tax; but then, as the tax gets larger, the m

41、arket shrinks so much that tax revenue starts to fall.,The Laffer Curve and Supply-Side Economics,The Laffer curve depicts the relationship between tax rates and tax revenue. Supply-side economics refers to the views of Reagan and Laffer who proposed that a tax cut would induce more people to work a

42、nd thereby have the potential to increase tax revenues.,Summary,A tax on a good reduces the welfare of buyers and sellers of the good. And the reduction in consumer and producer surplus usually exceeds the revenues raised by the government.,Summary,The fall in total surplus the sum of consumer surpl

43、us, producer surplus, and tax revenue is called the deadweight loss of the tax.,Summary,Taxes have a deadweight loss because they cause buyers to consume less and sellers to produce less. This change in behavior shrinks the size of the market below the level that maximizes total surplus.,Summary,As a tax grows larger, it distorts incentives more, and its deadweight