CONSUMER/PRODUCER SURPLUS, DEADWEIGHT LOSS & INTERNATIONAL TRADE
THE BENEFITS OF MARKETS
● Most obvious is, you know where to go to canvas the prices of the products you
want to buy – in the malls, on-line sales, tiangge, supermarkets or palengeke/
talipapa. Some people are shopping addicts (kawawa dahil sa pandemic
ngyon). Markets reduce search and transaction costs. You don’t have to go to
the provinces to barter your clothes with rice.
● Another important benefit in competitive markets is that the price goes down
because of competition among suppliers. We saw this in the firms in perfectly
competitive markets. This benefits the consumers, but the sellers are
stressed because of the competition and they cannot affect the market price.
● We saw in Chapter 4, supply and demand interactions erases shortages and
surpluses. For non-essential products, this is a contribution. For example, if
there is a shortage of diamonds used for diamond rings, the price will go up.
Only the rich to-be-married groom is hit. If there is a surplus of clothes and
shoes, SM goes into a big sale, and both SM and the shoppers benefit.
● But if the product is an essential product – like food or oil/ gas, we had
discussed before, that, if there are shortages, the market erases the shortage
by bringing the prices up. But the poor and lower income groups will suffer
and will be cut off from the markets. So, they should be helped by either
importing the food, and giving subsidies and donations to the lower income
groups to have access to food, gas for the stove, kerosene, cooking oil,
electricity and public transportation.
● Now in COVID pandemic times, many people lost jobs or went part-time due to
the closures and downsizing of restaurants, hotels, gyms, theater, movies,
massage and wellness centers, etc., etc. The shortage of labor cannot be helped
by the markets – even if wages go down – and so the government HAS TO help
the many unemployed and underemployed, and address increasing poverty.
● Sorry, we are talking about the wonders or benefits of the markets (I got
sidetracked partly but I just want to emphasize the wonders of the markets are
, qualified). Ch. 7 discusses another benefit and wonder of the markets. This
created the concept of the efficiency of markets. So please read Ch. 7 fully. This
is the concept of consumer and producer surpluses.
○ Willingness to pay
○ Consumer surplus
■ the amount a buyer is willing to pay for a good minus the amount
the buyer actually pays for it
■ Measures the benefit buyers receive from participating in a
market
○ Marginal buyer - buyer who would leave the market first if the price were
any higher
○ Demand curve reflects the buyers’ willingness to pay, can also be used
to measure consumer surplus
○ The area below the demand curve and above the price measures the
consumer surplus in a market
○ Consumer surplus is a good measure of economic well-being if
policymakers want to satisfy the preference of buyers
○ In most markets, consumer surplus does reflect economic well-being.
Economists normally assume that buyers are rational when they make
decisions so consumers are the best judges of how much benefit they
receive from the goods they buy
○ Cost - the value of everything a seller must give up to produce a good
○ Producer surplus
■ the amount a seller is paid minus the cost of production
■ Producer surplus measures the benefit sellers receive from
participating in a market
■ Can be measured using the supply curve
■ The area below the price and above the supply curve measures
the product surplus in a market
■ The benefit sellers receive
THE BENEFITS OF MARKETS
● Most obvious is, you know where to go to canvas the prices of the products you
want to buy – in the malls, on-line sales, tiangge, supermarkets or palengeke/
talipapa. Some people are shopping addicts (kawawa dahil sa pandemic
ngyon). Markets reduce search and transaction costs. You don’t have to go to
the provinces to barter your clothes with rice.
● Another important benefit in competitive markets is that the price goes down
because of competition among suppliers. We saw this in the firms in perfectly
competitive markets. This benefits the consumers, but the sellers are
stressed because of the competition and they cannot affect the market price.
● We saw in Chapter 4, supply and demand interactions erases shortages and
surpluses. For non-essential products, this is a contribution. For example, if
there is a shortage of diamonds used for diamond rings, the price will go up.
Only the rich to-be-married groom is hit. If there is a surplus of clothes and
shoes, SM goes into a big sale, and both SM and the shoppers benefit.
● But if the product is an essential product – like food or oil/ gas, we had
discussed before, that, if there are shortages, the market erases the shortage
by bringing the prices up. But the poor and lower income groups will suffer
and will be cut off from the markets. So, they should be helped by either
importing the food, and giving subsidies and donations to the lower income
groups to have access to food, gas for the stove, kerosene, cooking oil,
electricity and public transportation.
● Now in COVID pandemic times, many people lost jobs or went part-time due to
the closures and downsizing of restaurants, hotels, gyms, theater, movies,
massage and wellness centers, etc., etc. The shortage of labor cannot be helped
by the markets – even if wages go down – and so the government HAS TO help
the many unemployed and underemployed, and address increasing poverty.
● Sorry, we are talking about the wonders or benefits of the markets (I got
sidetracked partly but I just want to emphasize the wonders of the markets are
, qualified). Ch. 7 discusses another benefit and wonder of the markets. This
created the concept of the efficiency of markets. So please read Ch. 7 fully. This
is the concept of consumer and producer surpluses.
○ Willingness to pay
○ Consumer surplus
■ the amount a buyer is willing to pay for a good minus the amount
the buyer actually pays for it
■ Measures the benefit buyers receive from participating in a
market
○ Marginal buyer - buyer who would leave the market first if the price were
any higher
○ Demand curve reflects the buyers’ willingness to pay, can also be used
to measure consumer surplus
○ The area below the demand curve and above the price measures the
consumer surplus in a market
○ Consumer surplus is a good measure of economic well-being if
policymakers want to satisfy the preference of buyers
○ In most markets, consumer surplus does reflect economic well-being.
Economists normally assume that buyers are rational when they make
decisions so consumers are the best judges of how much benefit they
receive from the goods they buy
○ Cost - the value of everything a seller must give up to produce a good
○ Producer surplus
■ the amount a seller is paid minus the cost of production
■ Producer surplus measures the benefit sellers receive from
participating in a market
■ Can be measured using the supply curve
■ The area below the price and above the supply curve measures
the product surplus in a market
■ The benefit sellers receive
