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
>>
Difference is my
consumer surplus…
makes me smile
$2.25
“I blacked out constantly. My migraine problem got
worse and I didn’t feel like eating a thing.”
−Amosha, call centre worker
Call Centre
Workers
Amosha
Willingness to Pay
for Aspirin
(Rs per pack)
100
Aditya
80
Kali
70
Pranav
50
Demand “Curve” of the Four Call Centre Workers
WTP
(Rs)
Price of120
Aspirin
(Rs)
100
Amosha
100
Aditya
80
Kali
70
Pranav
50
80
60
40
D
20
0
11
22
33
44
Quantity of
Aspirin (#)
Where is Consumer Surplus?
WTP
(Rs)
Suppose PMKT = 60 R
Price of
Aspirin
(Rs)
Amosha’sC
onsumer
Surplus=
40 R
Consumer Surplus = area
under D and above Price
Aditva’s
20 R
Amosha
100
Aditya
80
Kali
70
Pranav
50
Kali’s 10 R
PMKT
D
1
2
3
4
Quantity of
Aspirin (#)
Market for Chardonnays, 2002-2003
Price
S2002
$2 wine
may have drained grape glut
August 17, 2003
P2002
D2002
Q2002
Quantity
Market for Chardonnays, 2002-2003
Price
$2 wine
S2002
August 17, 2003
S2003
A
P2002
may have drained grape glut
Consumer
Surplus
B
P2003=$2
2002
A
2003
A + B
B ↑ CS due
to ↓Price
Q2002 Q2003
D2002= D2003
Quantity
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).
coffee
coffee
cup/lid
Cost
Cost per
per Venti
Venti
$0.05
$0.05
$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
New
Albany
Starbucks
Corporate
Headquarters
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
$1.91
real
resources
transfer
Where is Producer Surplus?
Price of Bluefin Tuna ($ per lb)
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.
Height to Supply Curve = opp
cost of catching that bluefin
tuna
Lobster Draggers
Stick Boats
Seiners
Quantity of Bluefin Tuna
S
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.
S2006
Price
Producer
Surplus
P2007
B
P2006
2006
A
2007
A + B
D2007
A
D2006
Q2006 Q2007
Quantity
The Beauty of Competitive Markets
Price
(Rs per
pack)
The Aspirin Market in India, 2000
CONSUMER SURPLUS:
area under demand &
above price over the range
of output
S2000
150
125
100
75
PMKT
PRODUCER
SURPLUS: area
above supply &
below price over
the range of
output
2.5 billion Rs
50
D2000
1.25 billion Rs
25
0
0
12.5
25
37.5
50
QMKT
Quantity (millions of packs per month)
62.5
75
The Beauty of (Perfectly) Competitive Markets
(Perfectly) competitive
markets are efficient,
meaning that they
maximize social surplus (=
sum of consumer and
producer surplus).
“No Cure in Sight, As Aspirin Crisis Worsens”
—Times of India
What is the “disease?”
What are the symptoms?
Formulation
/Strength
(Uncoated)
Aspirin - 162.5 mg
Clopidogrel- 75
mg
Price Ceilings
Imposed June
29, 2001
Shortages
Pack Size
10's
Strip/Blister
Ceiling Price
(Rs.)
25
Source: National Pharmaceuticals Pricing
Authority, Ministry of Chemicals and Fertilizers
The Effect of Imposing a Price Ceiling on Aspirin
PMAX
Shortage
Q
s
Q
d
The Effect of Imposing a Price Ceiling on Aspirin
Deadweight Loss
(DWL) = Loss in
Social Surplus due
to the Price
Ceiling
Consumer Surplus
before Price Ceiling
Producer Surplus before
Price Ceiling
PMAX
Q
s
Q
d
Interpreting Deadweight Losses
s
Why?
DWL
Q to Q MKT are
not produced despite
benefit (WTP) > opp
cost for each Q.
Net
benefits =
forgone
PMAX
Quantity
Consumed &
Produced under
the price ceiling
s
Q
Quantity
Consumed &
Produced
without the
price ceiling
Winners and Losers from Price Ceilings
Producers are losers
Indian Aspirin Market, 2000-2007
Producer
Surplus
Price
D2000=D2007
(R per pack)
2000
T+U+V
2007
V
R
S
T+U
T
U
S2000=S2007
V
Loss in
Producer
Surplus
Quantity (millions of packs per month)
Winners and Losers from Price Ceilings
Consumers can be either winners
(T > S) or losers (T < S)
Consumer
Surplus
Indian Aspirin Market, 2000-2007
Price
D2000=D2007
(R per pack)
2000
R+S
2007
R+T
R
S
T–S
T
U
S2000=S2007
V
Change in
Consumer
Surplus
Quantity (millions of packs per month)
Supply and Demand
Price
Market for Brazilian Coffee, 1907-1908
($ per bag)
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
S
D
P = 15 – 0.5 Q
0
2
4
6
8
10
12
14
16
Quantity (millions of bags per year)
18
20
22
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).
Supply and Demand
Price
($ per bag)
Market for Brazilian Coffee, 1907-1908
S
D
P = 15 – 0.5 Q
Quantity (millions of bags per year)
Supply and Demand
Price
($ per bag)
Market for Brazilian Coffee, 1907-1908
S
excess supply or surplus
1907
excess demand
or shortage
1907
Quantity (millions of bags per year)
D
P = 15 – 0.5 Q
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 $10 per bag
Supply and Demand
Price
($ per bag)
Market for Brazilian Coffee, 1907-1908
S
PMin
price
floor
D
1907
Quantity (millions of bags per year)
Supply and Demand
Price
($ per bag)
Market for Brazilian Coffee, 1907-1908
S
new trees
S1913
PMin
price
floor
D
1907
Quantity (millions of bags per year)
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