In computing this total gain, the price paid by the buyer to the supplier just can-
cels out; that is, the terms involving the price P disappear. Note that for 10
hours of care (Q 10), the total gain is $40.
Second, starting from any inefficient agreement, there is a different, effi-
cient agreement that is better for both parties. In short, the best split of the
proverbial pie for both parties is attained when the pie is made as big as possi-
ble in the first place. For instance, suppose the parties agreed on seven hours
of day care per week at a price of $7. This inefficient agreement generates gains
to the grandmother and couple of $21 and $7, respectively. Clearly, both par-
ties would benefit from a 10-hour deal at an appropriate price. For instance, a
price concession by the grandmother to $6.50 with a 10-hour deal would bring
her $25 in profit and the couple $15 in consumer surplus. Both parties are bet-
ter off than with the seven-hour agreement.THE DAY-CARE MARKET Let’s now extend the previous analysis to the large
day-care market that emerged in the last 25 years. Figure 7.6 shows the weekly
demand curve for day care in a given geographical region. There is nothing
remarkable about this bare-bones demand curve. Depending on the going
hourly price for day care, more or less millions of day-care hours will be
demanded. The lower the price, the greater the number of hours purchased.
However, one aspect of this demand curve (or any demand curve) is important:
Besides showing the quantity consumed at any price, the demand curve shows the
monetary value that consumers are willing to pay for each unit.For instance, the “first”
few units consumed are valued at roughly $12, the demand curve’s price inter-
cept. Even at a rate this high, some parents (with high incomes, rotten kids, or
both) are willing to pay the high price for day care. But what about the 8 mil-
lionth hour of day care consumed? For this hour to be purchased, the hourly
price must drop to $4. Put simply, the value of any unit of day care is given by
the price the consumer is willing to pay for it.^9 (Thus, it is hard to claim that
the 8 millionth hour is worth $4.50 because the would-be consumer of this
hour is unwilling to pay that high a price.) In short, the value of a particular
unit is given by the height of the demand curve at that quantity.^10 For this rea-
son, the demand curve can be thought of as a marginal benefit curve.
Now suppose the going price for day care is in fact $4 per hour, with the
result that 8 million hours are purchased per week. What is the totalconsumer298 Chapter 7 Perfect Competition(^9) This valuation method is based on the notion of consumer sovereignty:Each individual is the best
judge of the value he or she derives from a purchase. When all the individual purchases are added
together, we obtain a market demand curve—the best measure of aggregate value from day-care
services. Thus, under the doctrine of consumer sovereignty, it would be improper for a government
authority to place either an arbitrarily high value (say, $30 per hour) or low value (e.g., $.50 per
hour) on day-care services.
(^10) Caution: We are notsaying that eachof the 8 million day-care hours consumed at a price of $4
is worth$4. We mean only that the last, 8-millionth, unit is worth $4. The other hours are worth
much more, as shown by the rising height of the demand curve as we move to smaller and smaller
quantities.
c07PerfectCompetition.qxd 9/29/11 1:30 PM Page 298