President Clinton’s “Level Playing Field” Claim
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Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good. Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good. Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good; the benefit each buyer enjoys from consuming the good less what each buyer must pay. Area Beneath the Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good. Consumer and Producer Surplus Applications Producer Surplus: The net benefit sellers enjoy from producing and selling the good Height of Market Supply Curve: The seller’s opportunity cost of providing a specific unit of the good. Producer Surplus: The net benefit sellers enjoy from producing and selling the good; what each seller receives from the sale of the good less the opportunity cost each seller incurs by providing it. Area above the Supply Curve Lying beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good. Review Consumer and Producer Surplus
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Transcript of President Clinton’s “Level Playing Field” Claim
Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good.
Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good.
Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good; the benefit each buyer enjoys from consuming the good less what each buyer must pay.Area Beneath the Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good.
Consumer and Producer Surplus Applications
Producer Surplus: The net benefit sellers enjoy from producing and selling the goodHeight of Market Supply Curve: The seller’s opportunity cost of providing a specific unit of the good.
Producer Surplus: The net benefit sellers enjoy from producing and selling the good; what each seller receives from the sale of the good less the opportunity cost each seller incurs by providing it.Area above the Supply Curve Lying beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good.
Review Consumer and Producer Surplus
Equilibrium
PC = 2.40 PF = 2.00
Review: Tax Incidence
P ($/gallon)
Q (thousands of gallon per day)
P* = 2.10
Q* = 8,000
.40
PC** = 2.40
PF** = 2.00
Q** = 7,500
D
S
The point on the demand curve is the equilibrium price from the perspective of consumers.
Start at the no tax equilibrium and move left until the vertical gap between the demand and supply curves equals the amount of the tax.
The point on the supply curve is the equilibrium price from the perspective of firms.
8,000 = 8,000
Tax: PF = PC TaxPF = PC .40
Quantity demanded determined by PC
Quantity supplied determined by PF
P = 2.10
7,500 = 7,500
Quantity Demanded Quantity Supplied
The associated quantity is the new equilibrium quantity.The price from the perspective of consumers increases, but by less than the full amount of the tax.
The equilibrium quantity decreases.
The price from the perspective of firms decreases, but by less than the full amount of the tax.The burden of the tax is shared between consumers and firms.
First, the no tax equilibrium.
Question: How can we quantify the burden borne by consumers and firms?
Producer Surplus – Area above the Supply Curve Lying beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good.
Consumer Surplus – Area Beneath the Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good.= 75
= 750= 25
= 2,250.30 7,500
½ .30500.10 7,500½ .10500
P ($/gallon)
P* = 2.10$.40
PC** = 2.40
PF** = 2.00D
S
B
A
D
F
2,325 × 3656,700
B:
C:D:E:
Market for
Gasoline
Q (thousands of gallon per day)Q* = 8,000Q** = 7,500
C
E
Consumer SurplusProducer SurplusGovernment SurplusTotal Surplus
Before Tax After Tax ChangeA+B+C A Lose B+CD+E+F F Lose D+ENothing B+D Gain B+D
A+B+C+D+E+F A+B+D+F Lose C+E
$2,325 thou$775 thou
+$3,000 thou$100 thou
Calculate the Areas:
Burden borne by consumers and firms
= $3,100
Benefit reaped by government = $3,000
Dead weight loss (Excess burden) = $100
Annual per capita loss of consumer surplus: $125
Question: By how much are consumers hurt?Question: By how much are firms hurt?Question: By how much are governments helped?Question: How much total surplus is lost?
= 2,325 + 775
2,250 + 75 = 2,325
750 + 25 = 7752,250 + 750 = 3,000
75 + 25 = 100
1 42 3 65
50
100
150
200
250
Q
P
D
300 SBenefits of
Student Tutoring
275225175100
7525
AndyKateDanLizMegNed
CostsTutor of Tutoring
275225200125
7525
KimJohnAdamLisaWaltBeth
Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good.
Height of Market Supply Curve: The seller’s opportunity cost of
providing a specific unit of the good.
Total Surplus: The total net benefits to society as a whole that the provision of a good provides.
Total Surplus and Efficiency
Review
Strategy: Four scenarios
1 42 3 65
50
100
150
200
250
Q
P
D
300 SBenefits of
Student Tutoring
275225175100
7525
AndyKateDanLizMegNed
CostsTutor of Tutoring
275225200125
7525
KimJohnAdamLisaWaltBeth
Which student values tutoring by the most?
Andy who values tutoring by $275.
Which tutor incurs the lowest costs of tutoring?
Beth who incurs cost of $25
Net benefit of the first tutor to society as a whole equals $250
The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Beth to tutor?Answer: Yes.
Scenario 1: One Tutor is Provided
1 42 3 65
50
100
150
200
250
Q
P
D
300 SBenefits of
Student Tutoring
275225175100
7525
AndyKateDanLizMegNed
CostsTutor of Tutoring
275225200125
7525
KimJohnAdamLisaWaltBeth
Which student values tutoring by the second most?
Kate who values tutoring by $225.
Which tutor incurs the second lowest costs of tutoring?
Walt who incurs cost of $75
Net benefit of the second tutor to society as a whole equals $150The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Walt to tutor?
Answer: Yes.
Scenario 2: A Second Tutor Is Provided
1 42 3 65
50
100
150
200
250
Q
P
D
300 SBenefits of
Student Tutoring
275225175100
7525
AndyKateDanLizMegNed
CostsTutor of Tutoring
275225200125
7525
KimJohnAdamLisaWaltBeth
Which student values tutoring by the third most?
Dan who values tutoring by $175.
Which tutor incurs the third lowest costs of tutoring?
Lisa who incurs cost of $125
Net benefit of the third tutor to society as a whole equals $50The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Lisa to tutor?
Answer: Yes.
Scenario 3: A Third Tutor Is Provided
1 42 3 65
50
100
150
200
250
Q
P
D
300 SBenefits of
Student Tutoring
275225175100
7525
AndyKateDanLizMegNed
CostsTutor of Tutoring
275225200125
7525
KimJohnAdamLisaWaltBeth
Which student values tutoring by the fourth most?
Liz who values tutoring by $100.
Which tutor incurs the fourth lowest costs of tutoring?
Lisa who incurs cost of $200
Net benefit of the third tutor to society as a whole equals negative $100
The vertical gap between the market demand and supply curves.
Question: From the perspective of society as a whole does it make sense for Adam to tutor?
Answer: No.
Scenario 4: A Fourth Tutor Is Provided
1 42 3 65
50
100
150
200
250
Q
P
D
300 SBenefits of
Student Tutoring
275225175100
7525
AndyKateDanLizMegNed
CostsTutor of Tutoring
275225200125
7525
KimJohnAdamLisaWaltBeth
Tutors Total Surplus
1 $250
2 250 + 150 = $400
3 250 + 150 + 50 = $450
4 250 + 150 + 50 100 = $350
Summary
A tutor should be provided whenever the benefits exceed the costs; that is, whenever the
demand curve lies above the supply curve.
A tutor should not be provided whenever the costs exceed the benefits; that is, whenever the
supply curve lies above the demand curve.
Total Surplus: The total net benefits to society as a whole that the provision of a good provides.
Question: What is the efficient number of tutors?
Efficiency: Whenever total surplus, the total net benefit to society as a whole, is maximized.
3
Generalization: Total Surplus and Efficiency
Efficiency Guidelines
Q
P
D
SWhen the demand curve lies
above the supply curve.
Benefits Exceed Costs
CostsExceed Benefits
Efficient Quantity
The benefits of providing a
unit exceed its costs.
More of the good should be provided
When the supply curve lies above the demand curve.
The costs of providing a unit exceed its benefits.
Less of the good should be
provided
Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific
unit of the good.
Height of Market Supply Curve: The
seller’s opportunity cost of providing a specific
unit of the good.
Question: What is the equilibrium quantity?
Efficiency: Whenever total surplus, the total net benefit to society as a whole, is maximized.
The efficient quantity appears to be the equilibrium quantity.
P*
Markets and Efficiency
Q
P
D
S
Q*Q
P
D
S
Q**
P*
PF**
PC**
No Tax Tax
Question: Do markets always lead to efficiency?
Efficiency: Whenever total surplus, the total net benefit to society as a whole, is maximized.
Answer: No.
Tax
Total surplus Total surplus
Dead weight loss: Loss of total surplus as a consequence of
the tax.
There are other factors which also cause markets to fail. We will explore them in later lectures.
