101+Class+08+W2008 - Principles of Economics I Economics...

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Unformatted text preview: Principles of Economics I Economics 101 Section 400 Class 8 Announcements Reading: Chapter 4 Assignment 5 Available online this afternoon Reminder: Exam February 11 8:00pm 10:00pm Practice exam available on CTools well Extra office hours available as Class 8 2 2/4/2008 Exam Room Assignments Section # 401 402 403 404 405 407 409 410 411 Section Time Fr 10:00 AM 11:30 AM Fr 11:30 AM 01:00 PM Fr 01:00 PM 02:30 PM Fr 11:30 AM 01:00 PM Fr 01:00 PM 02:30 PM Th 02:30 PM 04:00 PM Th 11:30 AM 01:00 PM Th 04:00 PM 05:30 PM Fr 02:30 PM 04:00 PM GSI Dimitriy Dimitriy Owen Dan Andrew Annika Annika Dan Andrew Exam Room 1800 CHEM 1800 CHEM 1210 CHEM 1210 CHEM 1800 CHEM 1800 CHEM 1800 CHEM 1210 CHEM 1800 CHEM 2/4/2008 Class 8 ? 3 Social Surplus $/unit Gross consumer valuation of Q* units Marginal Opportunity Cost Additional social Consumer surplus from the valuation of the marginal unit Marginal Valuation Opportunity cost of the marginal unit Gross opportunity cost of Q* units Q* 2/4/2008 Class 8 Social Surplus Units of output 4 Social Surplus and Pareto Efficiency Showed that producing a marginal unit may increase social surplus When MV > MC Explicitly, the marginal unit provides benefits to somebody (MV) that exceed the opportunity cost of producing the good (MC) Suggests that initial allocation is not efficient 2/4/2008 Class 8 5 Maximizing Social Surplus Implications: Efficiency demands that social surplus be maximized Maximization of surplus requires MV = MC If MV > MC, can make one person better off without hurting anyone by increasing output If MV < MC, can make one person better off without hurting anyone by decreasing output 2/4/2008 Class 8 6 Social Surplus and Deadweight Loss $/unit Gross consumer valuation of Q units MC Social surplus Increased surplus Deadweight Loss (DWL) Deadweight Loss (DWL) Lost Social Surplus MV Q0 Q1 Q2 2/4/2008 Class 8 Gross opportunity cost of Q units Units of output 7 Efficient Output Level Efficient allocation of resources demands Social Surplus is maximized MV = MC In a freely operating market, consumers and producers respond to the market price, P: Consumers purchase a quantity Qd such that P = MV Producers produce a quantity Qs such that P = MC Price is determined so that Qd = Qs Therefore, we have MV = P = MC Market clears Output level is efficient 2/4/2008 Class 8 8 The Efficiency of the Market $/unit Consumer surplus MC Supply Social surplus P* Producer surplus MV Demand Q* 2/4/2008 Class 8 Units of output 9 Beware... The efficiency of the market is a powerful and important result More important to understand it than simply to know it Implicit in the result are a series of hidden assumptions that may or may not be satisfied in any given market environment Much of the course will be spent talking about those conditions and identifying when the result applies and when it doesn't Class 8 10 2/4/2008 What happens when the market is unable to operate freely? Prices are unable to direct resources efficiently Observe inefficient allocation of resources 1. Price controls Two main examples: Price ceiling Price floor Examples: rent control, NBA cap on rookie salaries Example: minimum wage legislation, agricultural price supports 2. Price distortions 2/4/2008 Taxes Subsidies Class 8 11 The price floor Price support regulation for market where the equilibrium price would be deemed "too low" Example: Minimum wages Example: Agricultural price supports Illegal to pay less than the minimum wage Undesirable to sell for less than the minimum wage: the regulator promises to purchase any quantity at the regulated price Class 8 12 2/4/2008 Minimum Wage w Transfer from Extra Lost W consumers to min Producer producers Consumer Surplus Surplus W* Unemployment Labor Supply Deadweight Loss Lost Producer Surplus Labor Demand Ld L* Ls Class 8 2/4/2008 L 13 Agricultural Price Support P Net effect on consumer and Increased Producer Surplus Government purchase producer surplus Supply Psupport P* Lost consumer surplus Deadweight Loss (if Deadweight Loss (if the govt purchase is the govt purchase is distributed to the not distributed to the public) public) Demand Taxes Raised Qd Q* Qs Q 2/4/2008 Class 8 14 Price ceiling: Rent Control Rent control takes various forms Simple case ceiling imposed on prices To charge higher rents is illegal Rent control is supposed to be a benefit to renters Is it? 2/4/2008 Class 8 15 Rent Control $/apartment Underestimate of Lost consumer surplus Deadweight loss P P* P Supply Price Ceiling Lost Increased producer consumer surplus surplus Price Ceiling Demand Q Q* Class 8 # of Apartments 16 2/4/2008 Price controls Preventing prices from adjusting to equilibrium levels distorts the market Generates inefficiencies Lesson: if efficient allocation of resources is your goal; if conditions are satisfied that ensure market outcomes are efficient; then don't interfere with the way prices are determined Class 8 17 2/4/2008 ...
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This note was uploaded on 04/01/2008 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.

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