Lecture 3 complete version[Compatibility Mode]

Lecture 3 complete version[Compatibility Mode] - HE191...

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E191 HE191 Principles of Economics Lecture 3 ecture Notes Chapters 7 and 8 Lecture Notes, Chapters 7 and 8 Principles of Economics, Fourth Edition N. Gregory Mankiw
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elfare Economics Welfare Economics ± Study of how allocation of resources affects economic well-being ± Benefits received by ± Buyers ± Sellers ± hat are these benefits and how do we measure What are these benefits and how do we measure them? hows that market equilibrium maximizes tal ± Shows that market equilibrium maximizes total benefits received by buyers and sellers xplains arkets are usually a good way to ± Explains why markets are usually a good way to organize economic activity
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easuring Welfare: Consumer Surplus Measuring Welfare: Consumer Surplus Consumer surplus (CS) is the amount a buyer is willing to pay (WTP) minus the buyer actually pays: CS = WTP P WTP nthony 250 Suppose P = $260. Flea’s CS = $300 – 260 = $40. Anthony $250 Chad 175 The others get no CS because ey do not buy an iPod at this Flea 300 they do not buy an iPod at this price. otal CS = $40 John 125 Total CS = $40.
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CS with Lots of Buyers & a Smooth D Curve 60 CS is the area b/w P and the D curve, from to P The demand for shoes 50 0 to Q . ecall: area of h $ 30 40 Recall: area of a triangle equals ½ x base x height 20 Height of triangle is 0 10 $60 – 30 = $30 . Q D 0 5 10 15 20 25 30 So, CS = ½ x 15 x $30 = $225 .
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Cost and the Supply Curve ± Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost). ± Includes cost of all resources used to produce good, including value of the seller’s time. seller will only produce and ± Example: Costs of 3 sellers in the lawn-cutting business. Cost ngelo 10 A seller will only produce and sell the good if the price xceeds his or her cost ge o $0 Hunter 20 exceeds his or her cost. Hence, cost is a measure of Kitty 35 willingness to sell .
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Measuring Welfare: Producer Surplus (PS) 60 P he supply of shoes PS is the area b/w 50 The supply of shoes S P and the S curve, from 0 to Q . 30 40 The height of this triangle is 20 $40 – 15 = $25. o, PS =½x h 10 So, PS ½ x b x h = ½ x 25 x $25 = $312.5 0 0 5 10 15 20 25 30 Q
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What do CS, PS, and Total Surplus Measure? CS = ( value to buyers) – (amount paid by buyers) CS measures the benefit buyers receive from participating in the market. S = (amount ceived y sellers) ost PS = (amount received by sellers) – ( cost to sellers) S measures the enefit llers receive PS measures the benefit sellers receive from participating in the market. Total surplus = CS + PS TS measures the total gains from trade in a market.
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The Market’s Allocation of Resources ± In a market economy, the allocation of resources is decentralized, determined by the interactions of many self-interested buyers and sellers. ± “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but om their regard to their own interest.” from their regard to their own interest.
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Lecture 3 complete version[Compatibility Mode] - HE191...

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