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B200.F09.W05.Eff.GovPol.PowerPoint.R1

B200.F09.W05.Eff.GovPol.PowerPoint.R1 - Efficiency...

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Efficiency & Government Policies BUAD 200 Chapters 7,6 1
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Transaction Costs of Exchange Information Costs Search Costs Quality Identification Cost Negotiating Costs : Cost of agreeing on what and how much will be exchanged Transportation Costs : Cost of moving goods between parties 2
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Market Efficiency Chapter 7 3
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$ P x $ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 1 2 3 4 5 6 7 8 9 10 11 12 Qty x /T Supply Demand D x Market Interaction Pe Qe Exchange Value 4
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Allocation Efficiency: Price allocates the goods to highest valued users A B C Market $ P $ P $ P $ P Q/T D D D Qa Qb Qc Qe Pe Pe Marginal Value A = Marginal Value B = Marginal Value C = Market Price Demand Supply Market Demand determines Price. Each buyer responds to price by buying till Marginal Value equals price. No reallocation can generate greater value. Pe Pe 5
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Production Efficiency: Price coordinates the efficient use or resources Firm 2 Firm 1 Firm 3 Market $ P $ P $ P $ P Q/T Demand S 1 S 2 Qe Q1 Q2 Q3 Pe Pe Market Price = Marginal Cost Firm 1 = Marginal Cost Firm 2 = Marginal Cost Firm 3 Supply S 3 Market Supply is the sum of the industry output at alternative prices. Each firm produces up to the quantity where Price = Marginal Cost. No reallocation of resources will produce at a lower opportunity cost.
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