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Pam 2000 Lecture 16

Pam 2000 Lecture 16 - PAM2000Lecture16 Agenda...

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PAM 2000 Lecture 16 Agenda Consumer/producer surplus Social welfare Welfare and quantities lower or greater than eq’l Welfare effects of taxes, entry controls, price controls
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Recall: Consumer Surplus; measure of excess value to consumers
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Consumer Surplus
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Fall in Consumer Surplus From Roses as Price Rises
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Recall: Producer Surplus
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Producer Surplus (con’t) Recall that p *q is the firm’s revenue Producer surplus is that area minus firm’s variable costs To relate producer surplus to economic profit: PS = R – VC Profit is π = R – C, or R – (VC + F) So if F is zero (as in the long run) then PS and profits are the same
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Producer Surplus (con’t) If the LR supply curve is flat (recall conditions) then what is producer surplus? What happens to PS when price falls?
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Competition and Social Welfare   Economists measure social welfare as the combination of consumer and producer surplus: W = CS + PS Recall: D is MB curve and supply is MC curve
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Why producing less than e lowers  welfare    Say that output (for some reason) is lowered in the market from Q 1 to Q 2 Price rises to P 2 Then CS drops for sure Consumers lose areas B plus C
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Why producing  less than  e lowers  welfare Producers may either gain or lose They lose area E, but gain area B, so it depends on magnitudes B is the transfer from consumers to producers because price is higher Society overall loses areas C + E C + E is deadweight loss (DWL)
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Why Reducing Output from the Competitive Level Lowers Welfare
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