EconH200L7

EconH200L7 - The Efficiency of Markets What is the best...

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The Efficiency of Markets What is the best quantity to be produced from society’s standpoint, in the sense of maximizing the net benefit to society ? We need to look at the benefits to consumers and producers. Consumer Surplus Start by looking at each buyer’s willingness to pay (the maximum price the consumer would voluntarily pay to receive the good). An individual buyer’s consumer surplus from a purchase is her willingness to pay minus the purchase price. Exactly what we called a buyer’s “value” in our market experiment.
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Consider the example of the Elvis recording with 4 potential buyers. From each buyer’s willingness to pay, we can construct the market demand curve. At a price of $70, the quantity demanded is the number of people whose willingness to pay is at least $70. (John, Paul, and George make 3.) Why the flat segments? Why the vertical segments? What if the commodity is something like apples, where buyers might want to purchase more than one? Say John is willing to pay $1 for the first apple, and $0.50 for the second apple.
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Just like we can go from knowledge of everyone’s willingness to pay to the market demand curve, we can use the market demand curve to measure consumer surplus. The price is the willingness to pay of the marginal buyer. If the price is $70, then George is willing to pay $70, but would leave the market if the price were any higher. What about a price of $75? In a large market, the demand curve is smooth. There is someone who is willing to pay $75, but would leave the market if the price were any higher. At a price of $80, the consumer surplus in the
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This note was uploaded on 07/17/2008 for the course H 200 taught by Professor Fleisher during the Fall '08 term at Ohio State.

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EconH200L7 - The Efficiency of Markets What is the best...

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