AGECFNR 406 LECTURE 8.ppt

Static Efficiency Lecture Goals: Markets Part 1: Consumer Demand Key Point Importance of demand curves: willingness to pay ? price willingness to pay ? price Can we be creative in assessing willingness to pay? YES Can we be creative in assessing willingness to pay? YES Consumer surplus Producer surplus * AGEC/FNR 406 LECTURE 8 A rural market in the Philippines 1. Bring together supply and demand analysis 2. Identify equilibrium conditions and the key aspects of static efficiency What is a market? 1. A place where buyers and sellers interact (either physically or virtually)  4. A place where private decisions regarding  optimality are made. 3. A place where producers (or sellers) reveal  the cost of supplying goods  2. A place where consumers reveal their  willingness (and ability) to pay  Consumers make tradeoffs. Why? 1. Different bundles of goods provide  different levels of utility 2. Marginal utility is diminishing 3. Prices influence decision making 4. Choices depend on income A consumer’s optimal consumption pattern occurs where the marginal utilities of consumption are equal to the ratio of prices, i.e. where the budget constraint is tangent to the indifference curve. The goods that consumers demand reflect the tradeoffs that consumers are willing to accept. Demand curve Quantity Price A demand curve measures the amount of a particular good that a person would be willing to purchase at a range of prices, i.e. the marginal benefit. D = MB 20 1 25 ? Willingness to pay Quantity Price willingness to pay = area under demand curve D 1 Total willingness to pay = sum of willingness to pay for each and every unit of a good 25 ? ? 2 Willingness to pay Quantity Price D Total willingness to pay = area under the demand curve, located to the left of the allocation of interest. ? Total willingness to pa