Consumer Surplus: the total amount a buyer is ready to pay - the amount the customer actually gives ie. John is eager to pay 100 for an album, Paul 80, Ringo 50, and George 70. Within an auction john gets one for 80$, he benefits because he respected it as a 100$ and consumer surplus is 20$.
-in another example if there have been 2 indistinguishable copies of the album being auctioned both say sold at 70$, Ringo and George leave, and John and Paul receive the albums with 30$ and 10$ surplus respectively
-the "total consumer surplus" on the market would be 40$
Using the Demand Curve to Strategy Consumer Surplus
Now we look at the way the consumer surplus is seen on a demand curve example:
Figure 1 : all these people's willingness to pay for the album can be seen when the demand curve is graphed from the demand schedule made using the prior information on album demand.
-At any volume, the price distributed by the demand curve shows the willingness to pay of the marginal buyer (the customer who would leave the market first if the price were any higher)
ie. ringo leaves as soon as the price goes up above 50
We can also see the consumer surplus on the same demand curve graph:
Just like in physics area within the graph represents something. Within a demand curve it is consumer surplus.
-the lesson from this example holds for everyone demand curves: "The region below the demand curve and above the purchase price measures the buyer surplus in market. "
-this is true because the elevation of the demand curve steps the value buyers place on the good, as measured by their willingness to pay for it
-however, the demand curves we see of market segments are much smoother or a curve in form because the drop from willingness to pay is miniscule due to the massive amount clients in the market
However Lower Prices Raises Consumer Surplus
-in Figure 3 we observe how we're able to see consumer surplus in a hypothetical market with a typical linear demand
-moreover we are able to analyze the changes in consumer surplus as price is lowered
Figure 3: as price drops, we move down the demand range and we can easily see the new people that engage in buying and their consumer surplus, along with the new bigger surplus the old initial consumers have.
What Will Consumer Surplus Strategy?
-consumer surplus, the total amount that buyers are prepared to pay for a good without the amount they actually pay for it, measures the benefit that buyers receive from a good as the purchasers themselves perceive it
-therefore, consumer surplus is an excellent measure of economic wellbeing if policymakers want to value the tastes of customers (not necessarily the truth, ie. drug sellers/ users)
Producer Surplus (Sellers View):
Cost: the value of everything a retailer must quit to produce a good; in essence their opportunity cost (ie. painter would be time and supplies necessary for job)
-in the producer's case, the "cost" is the lowest price they can sell it at, if not they are losing money.
Just as the same circumstance as buyers retailers have their own version of surplus
Producer Surplus: amount received by the seller - the seller's cost of providing it
ie. example revolves around painters, cost would be things such as time, paints etc.
Grandma does the job for 600$ her cost is 500$ so her manufacturer surplus is 100$
Figure 4: same scenarios as purchasers we can easily see their costs (willingness to market) from the market's resource* curve
-at any amount, the price given by the supply curve shows the cost of the marginal vendor (the seller who leave the market first if the purchase price were any lower)
Figure 5: as one can see this time taking a look at the resource curve, it's the opposite of the buyer version, we take the aforementioned area of the graph rather than below it.
-the lesson out of this example pertains to all source curves: The area below the price and above the source curve measures the developer surplus in a market
-height measures vendor costs, and the difference between the price and the expense of production is each one of the seller's surplus
How AN INCREASED Prices Raises Company Surplus
-a price increase (ie. P1 to P2) brings about more amount being produced then we get new surplus from new producers who type in the market due to higher price, and then some additional surplus to the original producers
-the point of both these new techniques is the capability to precisely see how much the buyer or owner benefits from things like price increase / decrease
The Benevolent sociable planner
-looking at market benefits let's say there may be a person who want to control the market so that everyone wins how exactly does he start knowing when that time is; anything can be transformed to increase more be successful for both sides/ economical well-being
-to recognize that we look at Total Surplus (the manufacturer surplus + consumer surplus)
Consumer surplus = Value to purchasers - Amount paid by buyers
Similarly, we define manufacturer surplus as
Producer surplus = Amount received by sellers - Cost to sellers
When we add consumer and designer surplus along, we obtain
Total Surplus = (Value to purchasers - Amount paid by clients)+(Amount received by vendors - Cost to sellers)
Basically cancelling out the money in circulation and so we find that total surplus is all about the value something holds to the buyer (willingness to pay) and the cost it takes for the producers to make that item (opp. Cost)
-this leaves us with Total Surplus = Value to Clients - Cost to Sellers
If an allocation of resources maximizes total surplus, we say that the allocation exhibits efficiency.
Efficiency: resource allocation done in such a way as to maximize the full total surplus received by all people of population. < WIN, WIN ideal goal>
-if inefficient, some potential benefits from clients and sellers are not being came to the realization (ie. an allocation is inefficient when a good is not being produced by the vendors with most reasonably priced. In this case, moving production from a high-cost producer to a low-cost manufacturer will lower the total cost to retailers and raise total surplus
Equality: distributing the economical wealth to everyone equally
-A pie analogy - how big is the pie you want to increase is efficiency and the way you slice the pie for everybody is equality
-usually economists only care about efficiency, but policymakers consider equality
Evaluating the marketplace Equilibrium
Looking at number 7 we see that producers at ED lines won't be advertising anything since individuals are not prepared to buy it at that high a cost, and similarly purchasers only eager to buy at the costs of the EB series won't get anything since producers don't want to go that low.
From this we can say this about market effects:
1. Free market segments allocate the way to obtain goods to the potential buyers who value them most highly, as measured by their willingness to pay
2. Free markets allocate the demand for goods to the retailers who is able to produce them at the lowest cost
So can the planner do something as allocating more on to the purchasers or producers to increase economical well being? NO!
But can then change the amount of that to increase economical wellbeing?
NO! again because:
3. Free marketplaces produce the number of goods that maximizes the total of consumer and designer surplus.
To explain look at this figure:
Figure 8: if we are starting from a Q greater than the market equilibrium number, we can increase total surplus by minimizing Q and whether it's at a Q lower than market equilibrium volume we can again increase total surplus by increasing Q hence coming back back to equilibrium point
-so when there is a benevolent planner out there looking to discover the best economic market result, then all he must do is let things be and naturally achieve the equilibrium price/variety point.
As the People from france say: laissez faire, "Permit them to do"
Made 2 assumptions in this chapter: that markets are properly competitive (ie. identical market vitality) and doesn't consider externalities; both may lead to market failure