outline_ch06 - Chapter 6: Efficiency and Exchange I. Market...

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Chapter 6: Efficiency and Exchange
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I. Market Equilibrium and Efficiency
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Markets cannot be expected to solve every problem - e.g. market  economies do not  economic and financial stability in all a “fair” distribution of acceptable environmental quality, work and Realizing that markets cannot solve every problem has led some critics,  incorrectly, to conclude that markets cannot solve any problem! The Proper Domain of Markets
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Market Equilibrium and Efficiency Pareto efficiency (just Efficiency) refers to allocative efficiency: No individual can be made better off without one or more other individuals being made Note: “Better off” and “Worse off” in terms individual If the current allocation is Pareto efficient, reallocating goods must harm at least one individual in order to. Equilibrium of a Perfectly Competitive Market is Pareto !
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Key Idea: The Mutual Benefits of Voluntary Exchange In a voluntarily transaction both buyer and seller respectively will choose to buy and sell up to : For the Buyer the Marginal Benefits equal For the Seller The Marginal Costs equal
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S D
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Key Idea – The Mutual Benefits of Voluntary Exchange Consequently, in a Competitive Equilibrium where, at the going price, all buyers and sellers are able to do what they would like to do, the marginal benefits must equal
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Key Idea – The Mutual Benefits of Voluntary Exchange For the next-to-last unit traded the marginal benefits exceeded the marginal costs, which meant that it was Rational for buyers and sellers to trade an For the next unit after the last unit traded, the marginal costs exceed the marginal benefits and it is Rational for buyers and sellers not to
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Key Idea – The Mutual Benefits of Voluntary Exchange Pareto Efficiency means that it is not possible to rearrange the allocation of resources so as, unambiguously, to gain a net benefit – i.e. all possibilities for creating net economic surpluses that all individuals voluntarily will agree to, Consequently, a Competitive Market Equilibrium is Pareto
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Perfect Competition Every buyer and seller is a price-taker: No buyer or seller can Buyers and sellers both have: full information about the qualities of all full information about all Perfect competition implies that NOBODY has any
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Inefficient Markets Chapter 9 will study market forms where market power exists, and Pareto efficiency is prevented from realization Chapter 11 will analyze imperfect information In practice, most markets are imperfectly competitive
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Why Study Perfect Competition if it is Rare in Reality? Some markets are ‘reasonably close’ to being perfectly competitive or considered to be more efficient than any Easier to understand other market forms if one understands Perfect competition provides a benchmark
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Why Study Perfect Competition if it is Rare in Reality? In reality, the benefits of using markets are
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This note was uploaded on 07/20/2009 for the course PHYS physics 10 taught by Professor Goatman during the Spring '08 term at The University of British Columbia.

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outline_ch06 - Chapter 6: Efficiency and Exchange I. Market...

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