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lecture12 - Economics 103 Lecture 12 Applications of the...

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Economics 103 Lecture # 12 Applications of the Neoclassical Model.
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Equilibrium … one more time … with feeling!! Think of what you’ve learned so far: -maximization. - demand … individual and market. - supply … firm and market. -and the idea that the force of maximization lead to the equilibrium of P* and Q*. - CS and PS.
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In this equilibrium MC = MV. Those who value the goods most, get them. Those who have the lowest costs, make them. Together, the gains from trade are maximized. This was Adam Smith’s great insight, the private vice of the individuals still led to the public virtue of maximized wealth.
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Furthermore, we know in this equilibrium that every individual is also in equilibrium, and every firm is in equilibrium. Changes in any parameter lead to changes in the equilibrium. EG. Suppose there were three identical grocery stores, but not everyone lives the same distance from each store. The equilibrium might look like:
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Now suppose the third store introduces an innovation that lowers its costs. What happens? The supply curve of the third store falls, more people shop there. Fewer people shop at the other two stores, demand falls. In equilibrium, the prices, marginal values, and marginal costs are equal again across all of the stores.
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For many, this means But we don’t want to preach the virtues of the competitive world, we want to use this model to explain various things around us.
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1. Shifting Curves around. Why have human egg banks, started to appear? At one time the costs were high and demand low. Costs have fallen a tremendous amount and the delay of children has increased the demand, until a market arises.
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2. Trade one more time. Suppose Tom and Gary are not involved in trade. They generate consumer and producer surplus by themselves equal to the shaded area.
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If they are allowed to trade: There is a net benefit to both of them. What would happen if a third person came along who produced pigs at a lower price than Gary?
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Gain to Tom Loss to Gary Gain to Cindy Net Gain to the Economy. Will everyone be in favor of free trade? - Not Gary!
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3. The effect of a Tax. a. A $1 per unit tax on human egg storage. The first effect will be an increase in the MC of every firm of $1.
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