IE 13_ Efficiency and Competitive Markets.pdf - Page 1 of 5 Class Notes – Efficiency of Competitive Markets Efficiency and Competitive Markets A

IE 13_ Efficiency and Competitive Markets.pdf - Page 1 of 5...

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Page 1 of 5 Class Notes Efficiency of Competitive Markets 3/26/2019 7:33 AM Efficiency and Competitive Markets x A review of consumer and producer surplus. o Consumer surplus summing up the difference between what consumers are willing to pay and the price they must pay. The area below the demand curve and above the market price. The assumption of a common price for all. Calculating the area of CS x The linear demand curve and the area of the triangle. x The nonlinear demand curve and the integral. o Producer surplus summing up the difference between MC and the price received. MC as reflected by the industry supply curve. x Back to where the industry supply curve came from the sum of the MC curves of the individual firms where profit maximization => P = MC. x The area above the supply curve and below the market price. x The assumption of a common price for all. x Calculating the area of PS o The linear supply curve and the area of the triangle. o The nonlinear supply curve and the integral. x Is the PS the same as profit? o NO. Since the SR supply curve is the sum of SRMC’s, the costs it reflects are variable costs only. o So, PS must cover FC before it can cover profit. o And, we know that in the LR, price adjusts until profit is zero. o So, in a LR equilibrium, PS = FC, “the return to K”.
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