chapter7 - Chapter 7 Chapter 7 Efficiency and Exchange...

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Unformatted text preview: Chapter 7 Chapter 7 Efficiency and Exchange Efficiency and Exchange Consumer and Producer Surplus Consumer and Producer Surplus To understand efficiency, its useful to first understand consumer surplus and producer surplus. Consumer surplus: the difference between the amount that consumers value a good or service and the amount they pay for that good or service. Producer surplus: the difference between the amount that producers are paid for a good or service and the amount the good or service costs them. Consumer Surplus Consumer Surplus P Q D P* Producer Surplus Producer Surplus P Q S P* Consumer & Producer Surplus Consumer & Producer Surplus in Equilibrium in Equilibrium P Q S P* D Efficiency Efficiency Engineering Efficiency: Use the least resources to do something. In economics, an allocation is considered as efficient if no change could be made to help some people without harming others. Pareto Improvement: arrangements that could make some better off without making anybody worse off. Example Example Suppose I have 100 bags of chips and 100 sodas to distribute between 2 students, Alice and Betty. Are the following allocations likely to be efficient or inefficient? 1. Betty has all the chips and soda. Alice has nothing. 2. Betty has all the chips. Alice has all the soda. 3. Alice and Betty each have 40 bags of chips and 50 sodas. Efficiency Efficiency Markets coordinate the production of a wide range of goods and services. Are market outcomes efficient? Is Q* Efficient? Is Q* Efficient?...
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chapter7 - Chapter 7 Chapter 7 Efficiency and Exchange...

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