Production and consumption: Maximizing in the market place

4.1 Maximizing in the market place

Activity

Principles of Microeconomics: "Chapter 6, Section 1 and Section 2"

• Read Section 6.1 to revisit the concept of marginal costs and benefits within the context of the consumer's (and the firm's) maximizing behavior. Proceed to read Section 6.2, which defines two new concepts: consumer surplus and producer surplus. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter. Attempt the "Try It” problem for each section.

Khan Academy: "Demand Curve as Marginal Benefit Curve"

• Watch this video about the demand curve as a marginal benefit curve.

Khan Academy: "Consumer Surplus Introduction"

• Watch this video about consumer surplus.

Khan Academy: "Total Consumer Surplus as Area"

• Watch this video about total consumer surplus.

Khan Academy: "Producer Surplus"

• Watch this video about producer surplus.

"How Much to Produce? The Story of Marginal Revenue and Marginal Costs"

• Watch this video about how an apple farmer decides the optimal number of apples to pick. At the end of the video, consider whether or not the government should intervene. Think about which arguments you might make both supporting and disagreeing with the government acting in the market. In the next section, we will cover specific ways the government might participate in the market.

Wolfram Demonstrations Project: "Consumer and Producer Surplus"

• To use this simulation, you must download and install the Mathematica Viewer from the Wolfram Demonstrations Project. Although this software is free, it is a sizable download. This activity is therefore optional.

Surplus is a measure of the willingness of a producer or a consumer to participate in the marketplace. Total surplus is the sum of producer surplus and consumer surplus. The relative amounts of total surplus claimed by the consumer or the producer is determined by their respective elasticities of demand and supply. The following simulation shows how elasticities determine the sharing and magnitude of total surplus, consumer surplus, and producer surplus

Once you have downloaded the software to your desktop, open the simulation and read the instructions.

Change the respective elasticities by moving each slider. Note how the area of the blue triangle (consumer surplus) and the pink triangle (producer surplus) change proportionally to changes in the respective elasticities. Three positions for the sliders are of particular interest.

1. Move the sliders until the blue and pink areas of surplus are approximately equal. Look at the sliders, what can you conclude about the elasticities of demand and supply and how total surplus is shared?
2. Move the sliders to opposite ends of the slider bars. What conclusions can you draw about the relative differences in elasticity and the allocation of total surplus?
3. Move both sliders as far as possible to one side and then move them both to the other side. What can you conclude about products where both consumer and producer/seller have very inelastic or on the other hand where both have very elastic?