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Unformatted text preview: Microeconomics – Chapter #7 Outline – 10/24/07 THE INTERACTION OF PEOPLE IN MARKETS • Invisible hand – The idea that the free interaction of people in a market economy leads to a desirable social outcome; the term was coined by Adam Smith. • Competitive equilibrium model – A model that assumes utility maximization on the part of consumers and profit maximization on the part of the firms, along with competitive markets and freely determined prices. o The supply and demand model incorporates utility-maximizing consumers and profit-maximizing firms in competitive markets, we refer to it as the competitive equilibrium market . o Predicts a certain marginal benefit of consumption for each consumer and a certain marginal cost for each producer. INDIVIDUAL CONSUMERS AND FIRMS IN A MARKET • A market can serve as an information-processing, coordinating, and motivating device even if it does not take place at any one location. • Individual production and consumption decisions o Equilibrium price – The price at which quantity supplied equals quantity demanded. • Adjustment to the Equilibrium Price o Surplus – The situation in which quantity supplied is greater than quantity demanded o Shortage – The situation in which quantity demanded is greater than quantity supplied. REVIEW • Centrally coordinating and motivating is impossible • Economists describe the interactions of people in the market through the competitive equilibrium model. A DOUBLE-AUCTION MARKET • An experimental market is much like a real-world market except that one can observe all the actions of the participants. • Double-auction market – A market in which several buyers and several sellers state prices at which they are willing to buy or sell a good. Buyers Earn a Consumer Surplus • Consumer Surplus – The difference between what a person is willing to pay for an additional unit of a good – the marginal benefit – and the market price of the good. Sellers Earn a Producer Surplus • Producer Surplus – The difference between the price received by a firm for an additional item sold and the marginal cost of the items production BE SURE TO DISTINGUISH BETWEEN MARKET SURPLUS AND CONSUMER SURPLUS OR PRODUCER SURPLUS . • The experimental market has been tried many times (Double-auction market), and similar results have occurred each time. o The model comes very close to predicting the outcome of the double-auction market. • The double-auction market demonstrates both how a market works and how a model works at predicting the outcome of the market....
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This note was uploaded on 04/15/2008 for the course ECON 100 taught by Professor Stephaniemartin during the Fall '07 term at Allegheny.
- Fall '07