Market Efficiency

Question

• Are free markets the best way to distribute society’s resources?
• How do we measure consumer/producer welfare?

• How happy people are when they buy products?
• What about the stupid products? Will the society be better off if these money go into charity?
• Donate kidney for her son to be on top of the list? For her son’s school? For a new car?
• We need to measure welfare in dollars
• Government intervention

Consumer Surplus

Definition Consumer Surplus = Willingness to Pay (WTP) - Price (P)

• Demand curve = how much consumers are willing to pay at each price, a measurement of willingness
• Consumer Surplus = Area under the demand curve and above the price

Producer Surplus

Definition Producer Surplus = Price (P) - Willingness to Sell (WTS)

• WTS covers the cost
• Supply Curve = a measure of the WTS
• Producer Surplus = Area under the price and above the supply curve

Total Surplus

Moving the quantity, no matter to the left or to the right of the equilibrium point, less total surplus/welfare is obtained!