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12/17/2010 Econ 11-- Lecture #11 1
020030
50
58
66
70
26082
90
0150
(3)
Supply
schedule
(2)
Demand
schedule
(1)
Price
per unit
(pesos)
Note: Please correct the
data given in page I-167.
The sentence in line
4, Question 1 shouldread: The gaps in data
can be filled by
connecting the data
points for demand and
for supply, respectively,
with a straight line.
All the exercises that
follow will then be
straight forward.
Correction
12/17/2010 Econ 11-- Lecture #11 2
Lecture #11:
MARKETS AND ECONOMIC
WELFARE
MARKET SOLUTION PRICE & QUANTITY
IDENTIFYING WHO WINS AND WHO
LOSES WHOSE WELFARE?
ANALYSIS OF ECONOMIC WELFARE
APPLICATIONS TAXATION
CRIMES, CORRUPTION AND WELFARE
12/17/2010 Econ 11-- Lecture #11 3
MARKET EQUILIBRIUM
IT SOLVES THEPRICE AND THE QUANTITYPROBLEMS GIVEN MARKET SUPPLY AND
DEMAND.
IT DOES NOT TELL US
o WHO BENEFITS
o WHO LOSES
WELFARE ANALYSIS PROVIDES ANANSWER.
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12/17/2010 Econ 11-- Lecture #11 4
The concept of
ECONOMIC WELFARE (#1)
Understanding who benefits or losesfrom the transaction requires
analyzing the gains and losses of
consumers and of producers.
oCONSUMERS SURPLUS
oPRODUCERS SURPLUS
CONSUMER
SURPLUS(ConsumerWelfare)
12/17/2010 Econ 11-- Lecture #11 6
30
60
90
120
150
0
50 100 150 200 250
At price 150 pesos, there is
no buyer. But as the price
gets lower than 150 pesos,
more and more buyers are
willing to buy. At 120
pesos per unit, 50 units of
the good are bought.
Price
Quantity
Demand schedule
a
7/27/2019 s -11-Markets and Welfare
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12/17/2010 Econ 11-- Lecture #11 7
30
60
90
120
150
0
50 100 150 200 250
Price
Quantity
Demand schedule
a
LET US EVALUATE THE
CONSUMER SURPLUS
at pointa.
12/17/2010 Econ 11-- Lecture #11 8
CS1
30
60
90
120
150
0 50 100 150 200 250
We are interested in knowing the benefits
that are derivedby all the buyers the
CONSUMER. SURPLUS.
Price
Quantity
Demand schedule
a
12/17/2010 Econ 11-- Lecture #11 9
Calculating the Consumer Surplus:
Rules in Geometry
AREA OF A RECTANGLE =
Height Length
The area of the consumer surplus
(a right triangle) is one-half ofa RECTANGLE.
CONSUMER SURPLUS =
[Height Length].
CS1 = [150-120] 50 =
[30 50] = [1,500 pesos] =
750 pesos.Length
Height
120
150
0 50
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12/17/2010 Econ 11-- Lecture #11 10
CS1
30
60
90
120
150
0
50 100 150 200 250
We are interested in knowing the benefits
that are derivedby all the buyers.
CS1 = Consumer surplus
when price is 120 pesos
per unit.
Demand schedule
aAt pointa, the price is 120
pesos per unit. Themarginal
buyer is at pointa.
Price
Quantity
12/17/2010 Econ 11-- Lecture #11 11
30
60
90
120
150
0 50 100 150 200 250
At pointa, the marginal buyer
buys the 50th unit at 120 pesos per
unit, but at pointb, the marginal
buyer buys the 150th unit at 60
pesos per unit.a
b
TOTAL CONSUMER
SURPLUS INCREASES.
Price
Quantity
12/17/2010 Econ 11-- Lecture #11 12
CS1
30
60
90
120
150
0
50 100 150 200 250
CS2
CS3
CS1 Consumer Surplus of all buyers includingthe marginal buyer at point a who buys the 50th unit.
CS3 Consumer Surplus of allbuyers who were excluded at 120
pesos per unit but now buy at 60
pesos per unit.
Price
Quantity
a
b
CS2 Additional Consumer Surplus of thosebuyers who bought when the price was at 120 pesos
per unit now that the price was 60 pesos per unit.
7/27/2019 s -11-Markets and Welfare
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12/17/2010 Econ 11-- Lecture #11 13
CS2 = CS2 = (120-60) 50 = 60 50 = 3,000 pesosCS1
30
60
90
120
150
0
50 100 150 200 250
CS2CS3
CS1 = (30 50) = 750 pesos
CS3 = [(120-60) 100] = (60 100)= (6,000) = 3000 pesos
Price
Quantity
a
bTotal Consumer Surplus =
CS1 + CS2 + CS3=6,750 pesos
12/17/2010 Econ 11-- Lecture #11 14
30
60
90
120
150
0 50 100 150 200 250
TOTAL CONSUMER SURPLUS =
[150-60] 150 =[90 150] =
[13,500] = 6,750 pesos
a
b
TOTAL CONSUMER
SURPLUS INCREASES
from 750 pesos at point a
to 6,750 pesos at point b.
Price
Quantity
PRODUCER SURPLUS(Producer welfare)
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12/17/2010 Econ 11-- Lecture #11 16
30
60
90
120
150
0
50 100 150 200 250
Price
Quantity
Supply schedule
50a
All sellers willing to
sell at a lower price
above 30 pesos per
unit earn a producer
(sellers) surplus.
12/17/2010 Econ 11-- Lecture #11 17
30
60
90
120
150
0 50 100 150 200 250
Price
Quantity
Supply schedule
50a
b
225
At pointb, more
sellers sell at price
120 pesos per unit.
The Producer
Surplus increases.
12/17/2010 Econ 11-- Lecture #11 18
30
60
90
120
150
0
50 100 150 200 250
Price
Quantity
Supply schedule
50a
PS2
PS1
PS3
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Consumer Surplus
andProducer Surplus
at the
MARKET
EQUILIBRIUM
12/17/2010 Econ 11-- Lecture #11 20
0
Price
Quantity
Demand schedule
Supply schedule
At priceP0,
quantity sold is
Q0. Total cost of
transactions isP0times Q0.
P0
Q0
12/17/2010 Econ 11-- Lecture #11 21
0
Price
Quantity
Demand schedule
Supply schedule
CONSUMER
SURPLUS IS
SHADED.
CS
P0
Q0
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12/17/2010 Econ 11-- Lecture #11 22
0
Price
Quantity
Demand schedule
Supply schedule
PRODUCERSURPLUS IS
SHOWN WITH
THE
CONSUMER
SURPLUS.
CS
PS
P0
Q0
AT MARKET EQUILIBRIUM
CONSUMER SURPLUS AND
PRODUCER SURPLUS ARE
BOTHAT THEIR HIGHEST
POSSIBLE LEVELS.
WE NOW SHOW AN IMPORTANT
RESULT:
12/17/2010 Econ 11-- Lecture #11 24
P0
Q0
0
Price
Quantity
Demand schedule
CS
PS
Supply schedule
PRODUCER
SURPLUS IS
SHOWN WITHTHE
CONSUMER
SURPLUS.
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12/17/2010 Econ 11-- Lecture #11 25
If the price is higher, less is bought by
consumers and the consumer surplus is
LESS. The producers benefit more
since they gain more while selling less
than before.
0
Price
Quantity
Demand schedule
CS
P0
Q0
PS
Supply schedule
HIGH PRICE
12/17/2010 Econ 11-- Lecture #11 26
0
Price
Quantity
Demand schedule
CS
P0
Q0
PS
If the price is LOW, sellers will sell
according to their point on the supply
schedule. Benefits would tilt in favor
of consumers.Supply schedule
LOW PRICE
12/17/2010 Econ 11-- Lecture #11 27
0
Price
Quantity
Demand schedule
CONSUMER AND PRODUCER
SURPLUS ARE AT THEIR HIGHEST
LEVEL AT MARKET
EQUILIBRIUM.
CS
PS
P0
Q0
Supply schedule
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12/17/2010 Econ 11-- Lecture #11 28
The market equilibrium of supply and demand
yields consumer and producer surpluses for all
market participants.
Themarginal seller and themarginal buyer
transact
at the equilibrium market price.
At the market price, the marginal seller
and marginal buyer cannot earn any
surplus but all other sellers and buyers who
participate do.
12/17/2010 Econ 11-- Lecture #11 29
THIS IS THE ALL IMPORTANT RESULT
OF COMPETITIVE MARKETS!
UNDER COMPETITION, THE GAINS OF
CONSUMERS AND PRODUCERS ARE AT
THEIR HIGHEST.
SOCIETY BENEFITS WHEN
COMPETITION IN
MARKETS ARE FOSTERED.
12/17/2010 Econ 11-- Lecture #11 30
COMPETITION IN MARKETS LEAD
TO
EFFICIENT ECONOMIC OUTCOMES.
UNDER COMPETITION, THE WELFARE
OF SOCIETY IS PROMOTED.
THE PRINCIPLE OF THE
INVISIBLE HAND.
7/27/2019 s -11-Markets and Welfare
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Economic Welfare when there
are changes in market
conditions
Changes in government policies
can alter the positions of
consumers, sellers, and the
efficiency of the economy.
EXAMPLES
A tax per unit on a commodity
Foreign trade
oExports
oImports
Government actions -- taxes and
interventions in foreign trade
Corruption in government and business
Mafias and criminality
Effects of a Tax on a
Commodity
7/27/2019 s -11-Markets and Welfare
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12/17/2010 Econ 11-- Lecture #11 34
P0
Q0
0
Price
Quantity
Demand schedule
CS
PS
Supply schedule
A TAX PERUNIT ON A
COMMODITY
Tax per unit
STAX
QTAX
PTAX
PS
12/17/2010 Econ 11-- Lecture #11 35
P0
Q00
Price
Quantity
Demand schedule
CS
PS
Supply schedule
A TAX PER
UNIT ON A
COMMODITY
STAX
Tax per unit
QTAX
PTAX
PS
Total consumer loss
of welfare = upper
white trapezoid
Total producer loss of
welfare = lower white
trapezoid
12/17/2010 Econ 11-- Lecture #11 36
P0
Q0
0
Price
Quantity
Demand schedule
CS
PS
Supply schedule
A TAX PER
UNIT ON A
COMMODITY
STAX
Tax per unit
QTAX
PTAX
PS
Efficiency loss
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12/17/2010 Econ 11-- Lecture #11 37
Deadweight loss is equivalent to
a loss of economic efficiency.
Because ofdistortionor
allocational inefficiency, what
used to take place no longer
happens.
12/17/2010 Econ 11-- Lecture #11 38
Analysis of CRIMINALITY,
CORRUPTION, ETC. AND
ITS IMPACT ON
ECONOMIC WELFARE
12/17/2010 Econ 11-- Lecture #11 39
0
Price
Quantity
Demand schedule
Supply schedule
AN UNRULY SOCIETY WITH POOR PEACE & ORDER,
HIGH CORRUPTION AND CRIMINALITY, WITH
PERIODIC WORK DISRUPTIONS
CS
PS
P0
Q0
HIGH CORRUPTION AND
CRIMINALITY AFFECTSTRANSACTION COSTS.
THE UNIT COST OF THE
SUPPLY OF GOODS AND
SERVICES INCREASE.
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12/17/2010 Econ 11-- Lecture #11 40
0
Price
Quantity
Demand schedule
Supply schedule
AN UNRULY SOCIETY WITH POOR PEACE & ORDER,
HIGH CORRUPTION AND CRIMINALITY, WITH
PERIODIC WORK DISRUPTIONS
CS
PS
P0
Q0
THE PRICE GOES UP;
THE QUANTITY
SUPPLIED FALLS.
CS AND PS BOTH FALL,
SO THAT THERE IS LESS
WELFARE.
Padj
Qadj
SADJUSTED
12/17/2010 Econ 11-- Lecture #11 41
0
Price
Quantity
Demand schedule
Supply schedule
CS
PS
P0
Q0
PA
Extra unit
cost
SADJUSTED
ECONOMIC WASTE =
MOST OF THE LOSS IN
WELFARE IS CAPTURED
BY UNPRODUCTIVE
ELEMENTS
AN UNRULY SOCIETY WITH POOR PEACE & ORDER,
HIGH CORRUPTION AND CRIMINALITY, WITH
PERIODIC WORK DISRUPTIONS
PA
QA
12/17/2010 Econ 11-- Lecture #11 42
THINK OF THESE:
PIRATES IN THE HIGH SEAS INCREASE THECOST OF TRADED GOODS. (Off the coast of Somaliaat the entrance shipping route to the SUEZ CANAL).
TERRORISM AND KIDNAPPING INCREASE THECOST OF POLICE AND PEACEKEEPINGOPERATIONS.
UNRULY HEALTH HABITS IN THE THROWINGHOUSEHOLD GARBAGE INCREASE EVERY ONESHEALTH COSTS. THEY ALSO REDUCE OURAESTHETIC APPRECIATION OF THENEIGHBORHOOD.
CORRUPTION RAISES THE COST OFTRANSACTIONS IN THE ECONOMY.
ALL THESE AFFECTprice, cost, welfare andefficiency.
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12/17/2010 Econ 11-- Lecture #11 43
End of todays lecture.
Good day![Lecture 11]
