Class Notes - 10-29-07

Class Notes - 10-29-07 - Microeconomics Class Notes E...

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Microeconomics – Class Notes – 10/29/07 E. Efficient Market Outcome will maximize Total Surplus (T.S = C.S + P.S) 1. At Equilibrium – The market is efficient a. Any other outcome besides Q(0) will yield less surplus to society PROVING WHY CERTAIN POINTS ARE INEFFICIENT 2. Example: Quantity in market is below equilibrium (see graphs in binder) a. At Q(l), there is a wedge Q(l) is inefficient because this point is associated with lost surplus b. Q(l) is inefficient because the marginal benefit of consumption > M.C at Q(l) c. Example: Quantity in market is greater than equilibrium i. Q(h) is inefficient because it is associated with negative surplus ii. M.C > P, and P > M.B, thus [ M.C > M.B ] at Q(h) Thus, Q(h) cannot be efficient II. Measure Inefficiency A. Dead weight loss (DWL) a. Lost or negative surplus that is considered the inefficiency b. The loss in consumer and producer surplus from an inefficient outcome c. Find the DWL between the efficient outcome (level of production) and the actual outcome B. Taxes and DWL a. Government intervention has changed the relationship between M.C and
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