Demand & Suppaly Ppt Mba
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Transcript of Demand & Suppaly Ppt Mba
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SUPPLY AND DEMAND
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7Consumers, Producers, and the Efficiency ofMarkets
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REVISITING THE MARKETEQUILIBRIUM
Do the equilibrium price and quantity maximizethe 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.
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Welfare Economics
Welfare economicsis the study of how theallocation ofresources affects economic well-being.
Buyers and sellers receive benefits from takingpart in the market.
The equilibrium in a market maximizes the
total welfare of buyers and sellers.
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Welfare Economics
Equilibrium in the market results in maximumbenefits, and therefore maximum total welfarefor both the consumers and the producers of
the product.
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Welfare Economics
Consumer surplus measures economicwelfare from the buyers side.
Producer surplus measures economic welfare
from the sellersside.
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CONSUMER SURPLUS
Willingness to payis the maximum amountthat a buyer will pay for a good.
It measures how much the buyer values the
good or service.
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CONSUMER SURPLUS
Consumer surplusis the buyers willingness topay for a good minus the amount the buyeractually pays for it.
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Table 1 Four Possible Buyers Willingness to Pay
Copyright2004 South-Western
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CONSUMER SURPLUS
The market demand curve depicts the variousquantities that buyers would be willing andable to purchase at different prices.
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The Demand Schedule and theDemand Curve
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Figure 1 The Demand Schedule and the Demand Curve
Copyright2003 Southwestern/Thomson Learning
Price ofAlbum
0 Quantity ofAlbums
Demand
1 2 3 4
$100 Johns willingness to pay
80 Pauls willingness to pay70 Georges willingness to pay
50 Ringos willingness to pay
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Figure 2 Measuring Consumer Surplus with the DemandCurve
Copyright2003 Southwestern/Thomson Learning
(a) Price = $80Price of
Album
507080
0
$100
Demand
1 2 3 4 Quantity ofAlbums
Johns consumer surplus ($20)
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Figure 2 Measuring Consumer Surplus with the DemandCurve
Copyright2003 Southwestern/Thomson Learning
(b) Price = $70Price of
Album
50
7080
0
$100
Demand1 2 3 4
Totalconsumersurplus ($40)
Quantity ofAlbums
Johns consumer surplus ($30)
Pauls consumersurplus ($10)
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Using the Demand Curve to Measure ConsumerSurplus
The area below the demand curve and abovethe price measures the consumer surplus inthe market.
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Figure 3 How the Price Affects Consumer Surplus
Copyright2003 Southwestern/Thomson Learning
Consumersurplus
Quantity
(a) Consumer Surplus at Price PPrice
0
Demand
P1
Q1
B
A
C
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Figure 3 How the Price Affects Consumer Surplus
Copyright2003 Southwestern/Thomson Learning
Initialconsumer
surplus
Quantity
(b) Consumer Surplus at Price PPrice
0
Demand
A
B C
D E F
P1
Q1
P2
Q2
Consumer surplusto new consumers
Additional consumersurplus to initial
consumers
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What Does Consumer Surplus Measure?
Consumer surplus, the amount that buyers arewilling to pay for a good minus the amountthey actually pay for it, measures the benefit
that buyers receive from a good as the buyersthemselves perceive it.
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PRODUCER SURPLUS
Producer surplusis the amount a seller is paidfor a good minus the sellers cost.
It measures the benefit to sellers participating
in a market.
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Table 2 The Costs of Four Possible Sellers
Copyright2004 South-Western
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Using the Supply Curve to Measure ProducerSurplus
Just as consumer surplus is related to thedemand curve, producer surplus is closelyrelated to the supply curve.
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The Supply Schedule and theSupply Curve
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Figure 4 The Supply Schedule and the Supply Curve
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Using the Supply Curve to Measure ProducerSurplus
The area below the price and above thesupply curve measures the producer surplus ina market.
Figure 5 Measuring Producer Surplus with the Supply
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Figure 5 Measuring Producer Surplus with the SupplyCurve
Copyright2003 Southwestern/Thomson Learning
Quantity ofHouses Painted
Price ofHousePainting
500
800
$900
0
600
1 2 3 4
(a) Price = $600
Supply
Grandmas producersurplus ($100)
Figure 5 Measuring Producer Surplus with the Supply
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Figure 5 Measuring Producer Surplus with the SupplyCurve
Copyright2003 Southwestern/Thomson Learning
Quantity ofHouses Painted
Price ofHousePainting
500
800$900
0
600
1 2 3 4
(b) Price = $800
Georgias producersurplus ($200)
Totalproducersurplus ($500)
Grandmas producersurplus ($300)
Supply
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Figure 6 How the Price Affects Producer Surplus
Copyright2003 Southwestern/Thomson Learning
Producersurplus
Quantity
(a) Producer Surplus at Price PPrice
0
Supply
B
A
C
Q1
P1
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Figure 6 How the Price Affects Producer Surplus
Copyright2003 Southwestern/Thomson Learning
Quantity
(b) Producer Surplus at Price PPrice
0
P1 B C
Supply
A
Initialproducersurplus
Q1
P2
Q2
Producer surplusto new producers
Additional producersurplus to initialproducers
D E F
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MARKET EFFICIENCY
Consumer surplus and producer surplus maybe used to address the following question:
Is the allocation of resources determined by freemarkets in any way desirable?
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MARKET EFFICIENCY
Consumer Surplus
= Value to buyers Amount paid by buyers
and
Producer Surplus
= Amount received by sellers Cost to sellers
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MARKET EFFICIENCY
Total surplus
= Consumer surplus + Producer surplus
or
Total surplus
= Value to buyers Cost to sellers
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MARKET EFFICIENCY
Efficiencyis the property of a resourceallocation of maximizing the total surplusreceived by all members of society.
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MARKET EFFICIENCY
In addition to market efficiency, a socialplanner might also care about equity thefairness of the distribution of well-being among
the various buyers and sellers.
Figure 7 Consumer and Producer Surplus in the Market
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Figure 7 Consumer and Producer Surplus in the MarketEquilibrium
Copyright2003 Southwestern/Thomson Learning
Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
CB
D
E
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MARKET EFFICIENCY
Three Insights Concerning Market Outcomes
Free markets allocate the supply of goods to thebuyers who value them most highly, as measured
by their willingness to pay. Free markets allocate the demand for goods to
the sellers who can produce them at least cost.
Free markets produce the quantity of goods that
maximizes the sum of consumer and producersurplus.
Fi 8 Th Effi i f th E ilib i Q tit
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Figure 8 The Efficiency of the Equilibrium Quantity
Copyright2003 Southwestern/Thomson Learning
Quantity
Price
0
Supply
Demand
Costto
sellers
Costto
sellers
Valueto
buyers
Valueto
buyers
Value to buyers is greaterthan cost to sellers. Value to buyers is lessthan cost to sellers.
Equilibriumquantity
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Evaluating the Market Equilibrium
Because the equilibrium outcome is anefficient allocation of resources, the socialplanner can leave the market outcome as
he/she finds it. This policy of leaving well enough alone goes
by the French expression laissez faire.
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Evaluating the Market Equilibrium
Market Power
If a market system is not perfectly competitive,market powermay result.
Market power is the ability to influence prices.Market power can cause markets to be inefficient
because it keeps price and quantity from theequilibrium of supply and demand.
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Evaluating the Market Equilibrium
Externalities
created when a market outcome affectsindividuals other than buyers and sellers in that
market. cause welfare in a market to depend on more
than just the value to the buyers and cost to thesellers.
When buyers and sellers do not takeexternalities into account when deciding howmuch to consume and produce, theequilibrium in the market can be inefficient.
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Summary
Consumer surplus equals buyers willingness
to pay for a good minus the amount theyactually pay for it.
Consumer surplus measures the benefitbuyers get from participating in a market.
Consumer surplus can be computed by finding
the area below the demand curve and abovethe price.
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Summary
Producer surplus equals the amount sellersreceive for their goods minus their costs ofproduction.
Producer surplus measures the benefit sellersget from participating in a market.
Producer surplus can be computed by finding
the area below the price and above the supplycurve.
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Summary
An allocation of resources that maximizes thesum of consumer and producer surplus is saidto be efficient.
Policymakers are often concerned with theefficiency, as well as the equity, of economicoutcomes.
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Summary
The equilibrium of demand and supplymaximizes the sum of consumer and producersurplus.
This is as if the invisible hand of themarketplace leads buyers and sellers toallocate resources efficiently.
Markets do not allocate resources efficiently inthe presence of market failures.