AEM250LectureNotes1 - Topic: Market Success and Efficiency...

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Topic: Market Success and Efficiency • Competitive Markets Maximize Efficiency • Deadweight Loss Mankiw Principles: #2: The “value” of something is what you have to give up for it (opportunity cost). #3: Rational people think at the margin. #4 People respond to incentives. #6: Markets are usually a good way to organize economic activity. Adam Smith and the Virtues of “Self Love” (a.k.a. Self Interest) In Voluntary Exchange, Prices and “I Pencil” Market Supply = Market Demand (P=0.75, Q=75) Market Equilibrium is Where Market Supply Equals Market Demand 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 0 25 50 75 100 125 150 175 200 225 250 Million kL per Quarter Price $AU per kL Market Supply Market Demand Another Perspective: Demand = Marginal Benefits • To this point we have focused on quantity demanded as a function of price. – That is, for each price, how many units of a good would an individual or a group of individuals produce. • Another way if looking at the demand curve is that it measures the marginal benefit (or value) of each additional unit of the good consumed. – How much of other goods and services is an individual willing to give up to consume an additional unit of a good? Variation on Mankiw’s Economic Principle #2: The “value” of something is what you have to give up for it (opportunity cost). – i.e, what is their maximum willingness to pay for the additional
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unit? • Decreasing marginal benefit: the additional benefit from each unit decreases as quantity increases. Inverse Demand = Marginal Benefits Consumer Value and Consumer Surplus • Consumer value: The value to consumers of using a product is measured by the area under the demand curve. • Consumer surplus: the excess of consumer value above the cost paid by consumers for a product. – For an individual, it is the difference between what a person is willing to pay for an additional unit of the good – the marginal benefit – and the market price of the good. – For the market as a whole – it is the sum of all individual
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This note was uploaded on 03/30/2008 for the course AEM 2500 taught by Professor Poe,g. during the Spring '07 term at Cornell University (Engineering School).

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AEM250LectureNotes1 - Topic: Market Success and Efficiency...

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