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Market for Aspirin in India. “I blacked out constantly. My migraine problem got worse and I didn’t feel like eating a thing.” . −Amosha, call centre worker. Willingness to Pay for Aspirin. Call Centre Workers. (Rs per pack). Amosha. 100. Aditya. 80. Kali. 70. Pranav. 50.

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slide2

“I blacked out constantly. My migraine problem got worse and I didn’t feel like eating a thing.”

−Amosha, call centre worker

Willingness to Pay for Aspirin

Call Centre Workers

(Rs per pack)

Amosha

100

Aditya

80

Kali

70

Pranav

50

slide3

Demand “Curve” of the Four Call Centre Workers

Price of

Aspirin

(Rs)

D

1 2 3 4

1 2 3 4

Quantity of

Aspirin (#)

slide4

Consumer Surplus

Consumer surplus is the maximum amount a buyer is willing to pay (WTP) for a good minus the amount he or she actually pays for it.

My WTP for a Starbucks Venti

>

>

$2.25

Difference is my consumer surplus… makes me smile

slide5

Where is Consumer Surplus?

Suppose PMKT = 60 R

Price of

Aspirin

(Rs)

Consumer Surplus = area under D and above Price

Amosha’sConsumer Surplus=

40 R

Aditva’s

20 R

Kali’s10 R

PMKT

D

1 2 3 4

Quantity of

Aspirin (#)

slide6

Market for Chardonnays, 2002-2003

Price

$2 wine

may have drained grape glut

S2002

August 17, 2003

P2002

D2002

Q2002

Quantity

slide7

Market for Chardonnays, 2002-2003

Price

$2 wine

may have drained grape glut

S2002

S2003

August 17, 2003

A

P2002

B

P2003=$2

A

A

+

B

↑ CS due to ↓Price

B

D2002= D2003

Q2002

Q2003

Quantity

slide8

Producer Surplus

Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes).

Producer Surplus = Price – WTA

= $2.25 – $1.91

= $0.34

New Albany Starbucks

Corporate Headquarters

slide9

Producer Surplus

Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes).

real resources

transfer

slide10

Where is Producer Surplus?

The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen “to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task.” Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna.

S

Height to Supply Curve = opp cost of catching that bluefin tuna

Lobster Draggers

Price of Bluefin Tuna ($ per lb)

Stick Boats

Seiners

Quantity of Bluefin Tuna

slide11

Where is Producer Surplus?

The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen “to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task.” Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna.

S2006

Price

A

P2007

A

+

B

B

D2007

P2006

A

D2006

Q2006

Q2007

Quantity

slide12

The Beauty of Competitive Markets

CONSUMER SURPLUS: area under demand & above price over the range of output

2.5 billion Rs

1.25 billion Rs

PRODUCER SURPLUS: area above supply & below price over the range of output

slide13

The Beauty of (Perfectly) Competitive Markets

(Perfectly) competitive markets are efficient, meaning that they maximize social surplus (= sum of consumer and producer surplus).

slide14

“No Cure in Sight, As Aspirin Crisis Worsens”

—Times of India

What is the “disease?”

Price Ceilings

Imposed June 29, 2001

What are the symptoms?

Shortages

(Uncoated) Aspirin - 162.5 mg Clopidogrel- 75 mg

10's Strip/Blister

25

Source: National Pharmaceuticals Pricing Authority, Ministry of Chemicals and Fertilizers

slide16

The Effect of Imposing a Price Ceiling on Aspirin

Deadweight Loss (DWL) = Loss in Social Surplus due to the Price Ceiling

Consumer Surplus before Price Ceiling

Producer Surplus before

Price Ceiling

PMAX

s

d

Q

Q

slide17

Interpreting Deadweight Losses

s

Q to Q

are

MKT

not produced despite benefit (WTP) > opp cost for each Q.

Why?

Net benefits = forgone

DWL

P

MAX

Quantity Consumed & Produced without the price ceiling

Quantity Consumed & Produced under the price ceiling

s

Q

slide18

Winners and Losers from Price Ceilings

Producers are losers

Indian Aspirin Market, 2000-2007

Price

(R per pack)

D2000=D2007

S2000=S2007

R S

T U

V

T+U

Loss in Producer Surplus

Quantity (millions of packs per month)

slide19

Winners and Losers from Price Ceilings

Consumers can be either winners (T > S) or losers (T < S)

Indian Aspirin Market, 2000-2007

Price

(R per pack)

D2000=D2007

S2000=S2007

R S

T U

V

T – S

Change in Consumer Surplus

Quantity (millions of packs per month)

slide20

Supply and Demand

Price

($ per bag)

Market for Brazilian Coffee, 1907-1908

S

D

P = 15 – 0.5 Q

Quantity (millions of bags per year)

slide21

Supply and Demand

Why is demand downward sloping?

Substitution Effect – As price falls, it makes sense to substitute coffee for tea.

Income Effect—As price fall, incomes of coffee drinkers increase, inducing them to consume more coffee (and other stuff).

slide22

Supply and Demand

Price

($ per bag)

Market for Brazilian Coffee, 1907-1908

S

D

P = 15 – 0.5 Q

Quantity (millions of bags per year)

slide23

Supply and Demand

Price

($ per bag)

Market for Brazilian Coffee, 1907-1908

S

excess supply or surplus

1907

D

excess demand

or shortage

P = 15 – 0.5 Q

1907

Quantity (millions of bags per year)

slide24

Supply and Demand

Welfare Properties of Equilibrium:

If P ≠ Pe then some people can be made better off without anyone else being made worse off.

Two important functions of price:

Rationing Function

Allocative Function—sends signals to direct resources to their highest value uses.

slide25

Determinants of Supply and Demand

Determinants of Demand:

Income (normal versus inferior good)

Prices of Complements & Substitutes

Tastes

Expectations

Population

Determinants of Supply:

Technology

Factor Prices

Number of Suppliers

Expectations

Weather

slide26

New York Times, August 10, 1908

Brazilian Coffee Law:

Price Ceiling of $10 per bag

slide27

Supply and Demand

Price

($ per bag)

Market for Brazilian Coffee, 1907-1908

S

PMin

price

floor

D

1907

Quantity (millions of bags per year)

slide28

Supply and Demand

Price

($ per bag)

Market for Brazilian Coffee, 1907-1908

S

new trees

S1913

PMin

price

floor

D

1907

Quantity (millions of bags per year)

slide29

Along with the price floor, Brazil also “imposed a prohibitory tax on new trees.”

The New York Times, Sep 13, 1908

Suppose the tax is imposed on the sellers of trees