Market for Aspirin in
India
“
Consumer Surplus
Consumer surplus is the maximum amount a buyer is willing to pay (WTP) for a good minus the amount he or she actually pays for it.
My WTP for a Starbucks
Venti> $2.25
Difference is my consumer surplus… makes me smile
>
“I blacked out constantly. My migraine problem got worse and I didn’t feel like eating a thing.”
−Amosha, call centre worker
Willingness to Pay for Aspirin
(Rs per pack)
Amosha
Aditya
100
80
Kali
Pranav
70
50
Call Centre Workers
Price ofAspirin
(Rs)
Demand “Curve” of the Four Call Centre Workers
Quantity ofAspirin (#)
1 2 3 4 0
20
40
60
80
100
120
WTP (Rs)
Amosha 100
Aditya 80
Kali 70
Pranav 50
1 2 3 4
D
Price ofAspirin
(Rs)
Quantity ofAspirin (#)
1 2 3 4
WTP (Rs)
Amosha 100
Aditya 80
Kali 70
Pranav 50
D
Suppose PMKT = 60 R
PMKT
Amosha’sConsumer Surplus= 40 R
Aditva’s 20 R Kali’s 10 R
Consumer Surplus = area under D and above Price
Where is Consumer Surplus?
Price
Market for Chardonnays, 2002-2003
P2002
S2002
D2002
Q2002 Quantity
August 17, 2003
$2 wine may have drained grape glut
August 17, 2003
$2 wine may have drained grape glut
Price
Market for Chardonnays, 2002-2003
P2002
S2002
D2002= D2003
Q2002 Quantity
S2003
Q2003
P2003=$2
A
BConsumer
Surplus
2002
2003 A B+
A
B ↑ CS due to ↓Price
Producer Surplus
Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes).
Cost per Venti
coffee $0.05
Cost per Venti
coffee $0.05
cup/lid $0.09
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
store $0.29
New Albany Starbucks
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
store $0.29
baristas $0.41
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
store $0.29
baristas $0.41
managers (& up) $0.59 Corporate Headquarters
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
store $0.29
baristas $0.41
managers (& up) $0.59
taxes $0.34
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
store $0.29
baristas $0.41
managers (& up) $0.59
taxes $0.34
Total $1.91
Producer Surplus = Price – WTA
= $2.25 – $1.91
= $0.34
Producer Surplus
Producer surplus (PS) is the amount a seller is paid minus the minimum willingness to accept (WTA) to sell it (= opportunity cost of resources plus taxes).
Cost per Venti
coffee $0.05
cup/lid $0.09
cream $0.14
store $0.29
baristas $0.41
managers (& up) $0.59
taxes $0.34
Total $1.91
real resources
transfer
Where is Producer Surplus?The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen “to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task.” Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna.
Pric
e of
Blu
efin
Tun
a ($
per
lb)
Quantity of Bluefin Tuna
SHeight to Supply Curve = opp cost of catching that bluefin tuna
Seiners
Stick Boats
Lobster Draggers
Price
Quantity
Where is Producer Surplus?The increase in the wholesale price of bluefin tuna between the summer of 2006 and 2007 induced lobstermen “to put down their traps and take up rods and reels, chasing lucrative catches on slow-moving dragger boats ill prepared for the task.” Illustrate the change in producer surplus, assuming that the higher price was due to an increase in the demand for bluefin tuna.
Q2006
P2006
D2006
S2006
Producer Surplus
2006
2007
A
A
Q2007
P2007
D2007
BA B+
The Beauty of Competitive Markets
0
25
50
75
100
125
150
0 12.5 25 37.5 50 62.5 75
Price (Rs per pack)
Quantity (millions of packs per month)
The Aspirin Market in India, 2000
S2000
D2000PMKT
QMKT
2.5 billion Rs
1.25 billion Rs
CONSUMER SURPLUS: area under demand & above price over the range of output
PRODUCER SURPLUS: area above supply & below price over the range of output
(Perfectly) competitive markets are efficient, meaning that they maximize social surplus (= sum of consumer and producer surplus).
The Beauty of (Perfectly) Competitive Markets
“No Cure in Sight, As Aspirin Crisis Worsens”—Times of India
Formulation /Strength Pack Size
Ceiling Price (Rs.)
(Uncoated) Aspirin - 162.5 mg
Clopidogrel- 75 mg
10's Strip/Blister
25
Source: National Pharmaceuticals Pricing Authority, Ministry of Chemicals and Fertilizers
What is the “disease?” Price Ceilings
What are the symptoms? ShortagesImposed June
29, 2001
PMAX
Q Qds
Shortage
The Effect of Imposing a Price Ceiling on Aspirin
PMAX
Q Qds
The Effect of Imposing a Price Ceiling on Aspirin
Consumer Surplus before Price Ceiling
Producer Surplus before Price Ceiling
Deadweight Loss (DWL) = Loss in Social Surplus due to the Price Ceiling
PMAX
sQ
Interpreting Deadweight Losses
Quantity Consumed & Produced under the price ceiling
Quantity Consumed & Produced without the price ceiling
Q to QMKT
Why?
sare
not produced despite benefit (WTP) > opp cost for each Q.
Net benefits = forgoneDWL
Winners and Losers from Price Ceilings
Producers are losers
Indian Aspirin Market, 2000-2007
D2000=D2007
S2000=S2007
Price (R per pack)
Quantity (millions of packs per month)
Producer Surplus
2000
2007 R S
T U
V
Producer Surplus
2000 T+U+V
2007
Producer Surplus
2000 T+U+V
2007 V
T+U
Loss in Producer Surplus
Winners and Losers from Price Ceilings
Consumers can be either winners (T > S) or losers (T < S)
Indian Aspirin Market, 2000-2007
D2000=D2007
S2000=S2007
Price (R per pack)
Quantity (millions of packs per month)
Consumer Surplus
2000
2007 R S
T U
V
Consumer Surplus
2000 R+S
2007
Consumer Surplus
2000 R+S
2007 R+T
T – S
Change in Consumer Surplus
0 2 4 6 8 10 12 14 16 18 20 220123456789
10111213141516
Price ($ per bag)
Quantity (millions of bags per year)
Market for Brazilian Coffee, 1907-1908
S
D
Supply and Demand
P = 15 – 0.5 Q
Supply and Demand
Why is demand downward sloping?
1. Substitution Effect – As price falls, it makes sense to substitute coffee for tea.
2. Income Effect—As price fall, incomes of coffee drinkers increase, inducing them to consume more coffee (and other stuff).
Price ($ per bag)
Quantity (millions of bags per year)
Market for Brazilian Coffee, 1907-1908
S
D
Supply and Demand
P = 15 – 0.5 Q
Price ($ per bag)
Quantity (millions of bags per year)
Market for Brazilian Coffee, 1907-1908
S
D
Supply and Demand
P = 15 – 0.5 Q
1907
1907
excess supply or surplus
excess demand or shortage
Supply and Demand
Welfare Properties of Equilibrium: If P ≠ Pe then some people can be made better off without anyone else being made worse off.
Two important functions of price:
1. Rationing Function
2. Allocative Function—sends signals to direct resources to their highest value uses.
Determinants of Supply and Demand
Determinants of Demand:
1. Income (normal versus inferior good)
2. Prices of Complements & Substitutes
3. Tastes
4. Expectations
5. Population
Determinants of Supply:
1. Technology
2. Factor Prices
3. Number of Suppliers
4. Expectations
5. Weather
New York Times, August 10, 1908
Brazilian Coffee Law:
Price Ceiling of $10 per bag
Price ($ per bag)
Quantity (millions of bags per year)
Market for Brazilian Coffee, 1907-1908
S
D
Supply and Demand
1907
PMin
pricefloor
Price ($ per bag)
Quantity (millions of bags per year)
Market for Brazilian Coffee, 1907-1908
S
D
Supply and Demand
1907
PMin
pricefloor
S1913
new trees
Along with the price floor, Brazil also “imposed a prohibitory tax on new trees.”
The New York Times, Sep 13, 1908
Suppose the tax is imposed on the sellers of trees