Chapter 11 Outline

Chapter 11 Outline - Chapter 11: Applied Competitive...

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Chapter 11: Applied Competitive Analysis Economic Efficiency and Welfare Analysis Long-run competitive equilibria may allocate resources efficiently; consumer surplus (CS)- shown by area below D curve, above market P; producer surplus (PS)-shown by area below market price, above L-R S curve; area btwn D/S curves= sum of CS + PS = tot addt’l value obtained by: Market participants by being able to make market transaxns in this good; this tot area= sum of CS + PS max’ed @ competitive market equilb A Graphic Proof For output lvls < Q* (equilb Q), tot surplus reduced b/c D > S; accordingly, w/diff Ps, consumer or prod surplus will be reduced at the expense of the other’s poss gain- thus distribution of welfare losses fr producing < Q* depends on P @which transaxns are conducted (see graph pg. 318 ) A Mathematical Proof See proof pg. 319 Applied Welfare Analysis Competitive model used to examine consequences of changing econ’ic conditions on the welfare of market participants- which are usu measured by looking at changes in consumer, prod surplus Price Controls and Shortages Prices controlled below equilb lvls eg by govt deter L-R Supply responses, =>welfare losses for consumers & prod’s; eg. if govt imposes price ceiling=>shortage (Q D > Q S ) Welfare Evaluation Welfare consequences incl not necess just losses but also transfers- eg. can have transfer fr PS CS as result of price controls- thus affects relative well-being of market participants; can use graph to
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Chapter 11 Outline - Chapter 11: Applied Competitive...

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