Market for Aspirin in

India

“

       

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

>

“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

(Rs per pack)

Amosha

Aditya

100

80

Kali

Pranav

70

50

Call Centre Workers

Price ofAspirin

(Rs)

Demand “Curve” of the Four Call Centre Workers

Quantity ofAspirin (#)

1 2 3 4 0

20

40

60

80

100

120

WTP (Rs)

Amosha 100

Aditya 80

Kali 70

Pranav 50

1 2 3 4

D

Price ofAspirin

(Rs)

Quantity ofAspirin (#)

1 2 3 4

WTP (Rs)

Amosha 100

Aditya 80

Kali 70

Pranav 50

D

Suppose PMKT = 60 R

PMKT

Amosha’sConsumer Surplus= 40 R

Aditva’s 20 R Kali’s 10 R

Consumer Surplus = area under D and above Price

Where is Consumer Surplus?

Price

Market for Chardonnays, 2002-2003

P2002

S2002

D2002

Q2002 Quantity

August 17, 2003

$2 wine may have drained grape glut

August 17, 2003

$2 wine may have drained grape glut

Price

Market for Chardonnays, 2002-2003

P2002

S2002

D2002= D2003

Q2002 Quantity

S2003

Q2003

P2003=$2

A

BConsumer

Surplus

2002

2003 A B+

A

B ↑ CS due to ↓Price

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).

Cost per Venti

coffee $0.05

Cost per Venti

coffee $0.05

cup/lid $0.09

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

store $0.29

New Albany Starbucks

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

store $0.29

baristas $0.41

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

store $0.29

baristas $0.41

managers (& up) $0.59 Corporate Headquarters

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

store $0.29

baristas $0.41

managers (& up) $0.59

taxes $0.34

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

store $0.29

baristas $0.41

managers (& up) $0.59

taxes $0.34

Total $1.91

Producer Surplus = Price – WTA

= $2.25 – $1.91

= $0.34

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).

Cost per Venti

coffee $0.05

cup/lid $0.09

cream $0.14

store $0.29

baristas $0.41

managers (& up) $0.59

taxes $0.34

Total $1.91

real resources

transfer

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.

Pric

e of

Blu

efin

Tun

a ($

per

lb)

Quantity of Bluefin Tuna

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

Seiners

Stick Boats

Lobster Draggers

Price

Quantity

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.

Q2006

P2006

D2006

S2006

Producer Surplus

2006

2007

A

A

Q2007

P2007

D2007

BA B+

The Beauty of Competitive Markets

0

25

50

75

100

125

150

0 12.5 25 37.5 50 62.5 75

Price (Rs per pack)

Quantity (millions of packs per month)

The Aspirin Market in India, 2000

S2000

D2000PMKT

QMKT

2.5 billion Rs

1.25 billion Rs

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

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

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

The Beauty of (Perfectly) Competitive Markets

“No Cure in Sight, As Aspirin Crisis Worsens”—Times of India

Formulation /Strength Pack Size

Ceiling Price (Rs.)

(Uncoated) Aspirin - 162.5 mg

Clopidogrel- 75 mg

10's Strip/Blister

25

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

What is the “disease?” Price Ceilings

What are the symptoms? ShortagesImposed June

29, 2001

PMAX

Q Qds

Shortage

The Effect of Imposing a Price Ceiling on Aspirin

PMAX

Q Qds

The Effect of Imposing a Price Ceiling on Aspirin

Consumer Surplus before Price Ceiling

Producer Surplus before Price Ceiling

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

PMAX

sQ

Interpreting Deadweight Losses

Quantity Consumed & Produced under the price ceiling

Quantity Consumed & Produced without the price ceiling

Q to QMKT

Why?

sare

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

Net benefits = forgoneDWL

Winners and Losers from Price Ceilings

Producers are losers

Indian Aspirin Market, 2000-2007

D2000=D2007

S2000=S2007

Price (R per pack)

Quantity (millions of packs per month)

Producer Surplus

2000

2007 R S

T U

V

Producer Surplus

2000 T+U+V

2007

Producer Surplus

2000 T+U+V

2007 V

T+U

Loss in Producer Surplus

Winners and Losers from Price Ceilings

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

Indian Aspirin Market, 2000-2007

D2000=D2007

S2000=S2007

Price (R per pack)

Quantity (millions of packs per month)

Consumer Surplus

2000

2007 R S

T U

V

Consumer Surplus

2000 R+S

2007

Consumer Surplus

2000 R+S

2007 R+T

T – S

Change in Consumer Surplus

0 2 4 6 8 10 12 14 16 18 20 220123456789

10111213141516

Price ($ per bag)

Quantity (millions of bags per year)

Market for Brazilian Coffee, 1907-1908

S

D

Supply and Demand

P = 15 – 0.5 Q

Supply and Demand

Why is demand downward sloping?

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

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

Price ($ per bag)

Quantity (millions of bags per year)

Market for Brazilian Coffee, 1907-1908

S

D

Supply and Demand

P = 15 – 0.5 Q

Price ($ per bag)

Quantity (millions of bags per year)

Market for Brazilian Coffee, 1907-1908

S

D

Supply and Demand

P = 15 – 0.5 Q

1907

1907

excess supply or surplus

excess demand or shortage

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:

1. Rationing Function

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

Determinants of Supply and Demand

Determinants of Demand:

1. Income (normal versus inferior good)

2. Prices of Complements & Substitutes

3. Tastes

4. Expectations

5. Population

Determinants of Supply:

1. Technology

2. Factor Prices

3. Number of Suppliers

4. Expectations

5. Weather

New York Times, August 10, 1908

Brazilian Coffee Law:

Price Ceiling of $10 per bag

Price ($ per bag)

Quantity (millions of bags per year)

Market for Brazilian Coffee, 1907-1908

S

D

Supply and Demand

1907

PMin

pricefloor

Price ($ per bag)

Quantity (millions of bags per year)

Market for Brazilian Coffee, 1907-1908

S

D

Supply and Demand

1907

PMin

pricefloor

S1913

new trees

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