Market Equilibriumin

Perfect CompetitionWhat do buyers and sellers get out of the market?

AndWhy do economists think this is efficient?

Equilibrium (cont’d)

• At the market equilibrium price: • Quantity demanded by consumers = quantity

supplied by firms/producers/sellers

• Without a change in any of the ceterius paribus conditions, the price will remain unchanged

What does EQUILIBRIUM mean?

Demand Curve

$0$2

$4$6

$8$10

$12

1 2 3 4 5 6 7 8 9 10

Quantity Demanded

Av

era

ge

Pri

ce

(p

ric

e

pe

r u

nit

)

Consumer Surplus

Demand Curve is Also Marginal Valueand Avg Revenue

Amount Paid

CS

Total WTP =CS + Amt Paid

• Producer Surplus• The difference between what they get paid (total revenues) and what it costs

them

• Total Revenues• > = Average Price x Quantity Purchased

• Total Costs• > = Sum of Marginal Costs up to the amount supplied (QS)

• Or = the area under the supply curve up to Qs

What Do Sellers Get Out of This?

What is the Value of the Market

• Value of the market• To Consumers = Consumer Surplus• To Producers = Producer Surplus

• Value equals the sum of both CS and PS

Evaluating the market equilibriumMarket outcomes

1. Free markets allocate the supply of goods to the buyers who value them most highly

Measured by their willingness to pay2. Free markets allocate the demand for goods to the sellers who can produce

them at the least cost Only produce if you are paid as much (or more) than product costs to make (MC)

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Market Efficiency

Evaluating the market equilibrium◦ Social planner

Cannot increase economic well-being by Changing the allocation of consumption among buyers Changing the allocation of production among sellers

Cannot rise total economic well-being by Increasing or decreasing the quantity of the good

3. Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus

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Market Efficiency

The efficiency of the equilibrium quantity

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9

Price

At quantities less than the equilibrium quantity, such as Q1, the value to buyers exceeds the cost to sellers. At quantities greater than the equilibrium quantity, such as Q2, the cost to sellers exceeds the value to buyers. Therefore, the market equilibrium maximizes the sum of producer and consumer surplus.

0 QuantityEquilibrium

quantity

Demand

Supply

Q1 Q2

Valueto

buyers

Valueto

buyers

Costto

sellers

Costto

sellers

Value to buyers is greater than cost to sellers

Value to buyers is less than cost to sellers

• Evaluating the market equilibrium• Equilibrium outcome

• Efficient allocation of resources• Consumers:

• Goods to those who value it most (MV >= P)• Suppliers

• Goods produced by those with least costs/most efficient production (P>MC)• Efficient use of resources

• Produce only goods whose value is >= cost of using the resources

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Market Efficiency