Section 8 Chapter 9

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# Section 8 Chapter 9 - PowerPoint PPT Presentation

Section 8 Chapter 9. Consumer welfare. Consumer welfare from a good is the benefit a consumer gets from consuming that good minus what the consume paid to buy the good. Consumer surplus is the difference between what a consumer is willing to pay for the

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## Section 8 Chapter 9

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### Section 8Chapter 9

Econ 101 Daniela Ielceanu, UNC-Ch

Consumer welfare
• Consumer welfare from a good is the benefit a consumer gets from consuming that good
• minus what the consume paid to buy the good.
• Consumer surplus is the difference between what a consumer is willing to pay for the
• quantity of good purchased and what the good actually costs
• Graphically, for each individual, the consumer surplus is the area under the demand curve
• and above the market price up to the quantity the consumer buys.
• Graph1:
• Graph 2:
• Market consumer surplus is the area under the market demand curve above the market
• price, up to the quantity consumers buy.

Econ 101 Daniela Ielceanu, UNC-Ch

Effects of a price change on consumer surplus
• Graph: Consumer surplus loss from a higher price
• Problem: Consider two demand curves that go through an initial equilibrium point e1. One
• demand curve is less elastic than the other at e1. For which demand will the increase in
• price cause larger consumer surplus loss?

Econ 101 Daniela Ielceanu, UNC-Ch

Producer welfare
• Producer surplus is the difference between the amount for which a good sells and the
• minimum amount necessary for the seller to be willing to produce the good.
• Graphically:
• Producer surplus is revenue minus variable cost
• PS=profit – VC
• Note: another interpretation of producer surplus is gain from trade.

Econ 101 Daniela Ielceanu, UNC-Ch

Problem1
• Problem 1
• p
• 3
• 0.1
• 20 q
• Figure 9.6 shows an individual's demand curve for time per month spent telecommunicating while driving (talking on the car phone.) A car phone is useless except for talking with somebody who is not in the car. If calls are priced at ten cents per minute, what is the consumer surplus derived from talking? What is the most this person would pay for the car phone? Explain.

Econ 101 Daniela Ielceanu, UNC-Ch

Problem 2
• Problem 2
• Suppose the market supply curve for wheat is shown in Figure 9.7. Calculate the producer
• surplus when price is \$2 per bushel. If legislation mandates that the price be \$1 per bushel,
• what is the resulting loss in producer surplus?
• P
• 2
• 1
• .5
• 500 1200 q

Econ 101 Daniela Ielceanu, UNC-Ch

Competition maximizes welfare
• C common measure of the welfare of the society is the sum of consumer and producer
• Surplus
• W=CS+PS
• Competition maximizes welfare: producing less or more than the competitive output lowers
• welfare.

Econ 101 Daniela Ielceanu, UNC-Ch

Policies that shift the supply curve
• Restricting the number of firms in the market
• Regulations
• B. Raising entry or exit barriers
• Ex. Regulation of taxicabs
• Graphically:
• Problem
• Suppose anyone with a driver's license is capable of supplying one trip from the airport to
• the downtown business center on any given day. The long-run supply curve of such trips is
• horizontal at p = \$50, which is the average cost of such trips. Suppose daily demand is Q =
• 1000 - 10p. Calculate the change in consumer surplus, producer surplus and social welfare
• if the city government requires those people supplying such trips to possess a special

Econ 101 Daniela Ielceanu, UNC-Ch

Policies that create a wedge between supply and demand
• Welfare effects of a tax
• Graphically:
• Problem
• Figure 1 shows the demand and supply curves in the market for milk. Currently the
• market is in equilibrium. If the government imposes a \$2 per gallon tax to be collected from
• sellers, estimate the change in p, Q, and social welfare.
• S
• 4
• 3
• 2
• D
• 500 1000 1500
• Figure 1

Econ 101 Daniela Ielceanu, UNC-Ch

Welfare effects of price floors
• Graphically
• Effects: excess production
• inefficiency in consumption
• Problem
• Figure 1 shows the demand and supply curves in the market for milk. Currently the market
• is in equilibrium. If the government establishes a \$4 per gallon price support, estimate the
• change in p, Q, and social welfare.

Econ 101 Daniela Ielceanu, UNC-Ch

Welfare effects of price ceilings
• Graphically
• Problem

Figure 1 shows the demand and supply curves in the market for milk. Currently the market is in equilibrium. If the government establishes a \$2 per gallon price ceiling to ensure that children are nourished, estimate the change in p, Q, and social welfare

Econ 101 Daniela Ielceanu, UNC-Ch