14 - Topic: Market Success and Efficiency Market Shifts in...

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Topic: Market Success and Efficiency • Market Shifts in Supply and Demand: Four Simple Rules (continued) • Competitive Markets Maximize Efficiency • Deadweight Loss Mankiw Principles : #2: The “value” of something is what you have to give up for it (opportunity cost ). #3: Rational people think at the margin. #4 People respond to incentives. #6: Markets are usually a good way to organize economic activity.
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Market Supply = Market Demand (P=0.75, Q=75) Market Equilibrium is Where Market Supply Equals Market Demand 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 0 25 50 75 100 125 150 175 200 225 250 Million kL per Quarter Price $AU per kL Market Supply Market Demand
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Another Perspective: Inverse Demand = Marginal Benefits • To this point we have focused on quantity demanded as a function of price. – That is, for each price, how many units of a good would an individual or a group of individuals produce. • Another way if looking at the demand curve is that it measures the marginal benefit (or value) of each additional unit of the good consumed. – How much of other goods and services is an individual willing to give up to consume an additional unit of a good? Variation on Mankiw’s Economic Principle #2: The “value” of something is what you have to give up for it (opportunity cost ). – i.e, what is their maximum willingness to pay for the additional unit? • Decreasing marginal benefit: the additional benefit from each unit decreases as quantity increases.
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Consumer Value and Consumer Surplus • Consumer value : The total value or simply value to consumers of using a product is measured by the area under the inverse demand curve. • Consumer surplus : the excess of consumer value above the cost paid by consumers for a product. – For an individual, it is the difference between what a person is willing to pay for an additional unit of the good – the marginal benefit – and the market price of the good. – For the market as a whole – it is the sum of all individual consumer surpluses, or the area below the market demand curve and above the market price.
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14 - Topic: Market Success and Efficiency Market Shifts in...

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