Consumer and Producer Surplus in Different Market Structures

Posted on Dec 9, 2024 in Economy

Consumer Surplus

Willingness to pay is the maximum price a buyer would pay for a good or service.
At an auction, the buyer who eventually acquires the property is the one with the highest willingness to pay.
The rest of the participants cease to compete because the last price offered exceeds what they are willing to pay for the commodity.
The purchase plan gives us an idea about the willingness to pay of consumers, in the example of ice cream.
If the price is greater than $100, consumers do not eat ice cream. They are willing to participate in the market provided the price is less than $100.
The equilibrium price in this market is $60. All consumers who are willing to pay more than $60 participate in this market, while the rest simply would not.
The sum of individual benefits shows us the full benefit of this example. See this same situation in the graph of market equilibrium.

Producer Surplus

Willingness to sell is the minimum price a bidder is willing to receive for a good or service. The minimum price must cover at least the cost of production.
Minimum price = cost + opportunity cost of production factors
If the transaction price is higher than that, the producers are willing to sell.
Producer surplus is made up of all combinations of price and quantity that are under the equilibrium point and the supply function.
In the model of perfect competition, these combinations form a triangle.

Market

  • A physical location to which people come to buy and sell goods.
  • In order for the exchange to occur, there must be those who demand and those who offer.
  • A set of mechanisms and procedures by which buyers and sellers of a good or service come into contact to market it.
  • Types of markets: fruit, cars, stock, oil, copper, etc.

Economic Systems

  • Model of perfect competition
  • Model of imperfect competition
  1. Monopoly
  2. Monopsony
  3. Oligopoly
  4. Monopolistic competition

Perfectly Competitive Market

  1. A competitive market, or a perfectly competitive market, is one where there are many buyers (applicants) and many sellers (suppliers) of goods so that each of them exerts a negligible influence on the market price.
  2. The market determines the price of traded goods and coordinates the decisions of firms and households.
  3. The goods offered for sale are all equal.
  4. Buyers and sellers are so numerous that no buyer and no seller can influence the market price (price takers).

Requirements:

  • Large number of buyers and sellers
  • Perfect information on prices, quality, and terms of trade
  • A large number of alternative or complementary products that can relax the supply or demand
  • Free market entry and exit
  • Homogeneous, standardized, undifferentiated products


Monopoly: Model of Imperfect Competition

  1. There is a monopoly when there is a single seller or producer in the market supplying a product to meet the needs of that sector.
  2. To be successful, there must be no threat of entry of another competitor in the market.
  3. In a monopoly, a higher price is set, and a smaller quantity is offered than in perfect competition.
  4. The monopolist chooses the price and lets consumers decide how much they want to buy of that good.

Oligopoly: Model of Imperfect Competition

  1. There is a small number of companies in the same sector, which dominate and have control over the market.
  2. These companies can produce identical goods or services (such as steel, cement, or industrial alcohol, which are physically identical and hardly distinguishable) or goods or services differentiated by some particular aspect, as is the case with products such as breakfast cereals, detergents, and household appliances.
  3. It is similar to a monopoly, but the power is not concentrated in a single producer but in a small group of producers.
  4. Each one of the producers, because it produces a significant amount of the total, has an important influence on the market, giving it the power to intervene and manipulate the prices and quantities of the product on the market.
  5. In this way, there is more than one product of the same type on the market, but due to the control and power that these companies have, you see the same problems and limitations imposed by a monopoly.
  6. One of the most common barriers to entry imposed by an oligopoly is the amount of money needed to join this select group of producers in the market.
  7. Given the existence of such powerful producers in the market, a new producer wishing to access it would need a very large amount of money to allow it to compete without being eliminated early in the market.

Monopsony: Model of Imperfect Competition

  1. Monopsony is a monopoly of demand, i.e., one buyer and many sellers.
  2. This is the case where a person, company, or country can significantly affect the price of what it buys by varying the quantities purchased.
  3. The monopsonist determines, then, automatically the price at which it wants to buy a certain amount.

Oligopsony: Model of Imperfect Competition

If there are multiple buyers, we say that there is an oligopsony.

Monopolistic Competition

This type of market model is a mixture of perfect competition and monopoly:
  1. There are many companies offering.
  2. The product they offer is similar but with slight differences.
  3. There are many buyers.
  4. There are no restrictions on the entry of new firms.
  5. Both companies and consumers are fully informed about prices and products available in the industry.

Alternative Economic Systems

  • Authoritarian Economy (Centrally Planned)
  1. The three decisions are taken by the State; there is no market as an allocator of resources.
  2. The State allocates resources to different industries and indicates the amount to be produced, as well as the work to be done and how the goods are distributed.
  3. Market prices have no significant role; everything fits into the distribution plan developed.