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review_ch1 - 1.5 Pareto efficiency An allocation is Pareto...

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Chapter 1 Review: The Market We review here chapter 1 of Varian’s “Intermediate Microeconomics”. 1 1.1 Optimization and equilibrium The two principles of economics are 1) The optimization principle - people choose actions that are in their (best) interest, and 2) The equilibrium principle - prices adjust until people’s demand of something is equal to the amount that is supplied. 1.2 The demand curve Economists call a person’s maximum willingness to pay for something that person’s reservation price . 1 This is not a substitute to reading the text and doing the exercises at the end of the chapter. 1
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2 CHAPTER 1. REVIEW: THE MARKET 1.3 Equilibrium Equilibrium in the market involves 1) situation when demand equals supply, and 2) a price that clears the market. 1.4 Comparative statics “Comparative” means compare two equilibria and “statics” means only looking at equilibria, not at the adjustment process.
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Unformatted text preview: 1.5 Pareto efficiency An allocation is Pareto efficient if there is no way to make some group of people better off without making someone else worse off. Put differ-ently, if something is not Pareto efficient, then there is some way to make some people better off without making someone else worse off. Note also if something is not Pareto efficient, then there is some kind of “waste” in the allocation system. 1.6 Short-run Vs. long-run The short-run and long-run in microeconomic analysis are not directly re-lated to time. Rather, short-run looks at the case when only one explana-tory variable is allowed to change (e.g. production as a function of labor). In the long-run, all variables are allowed to adjust (e.g. production does not depend only on labor, but many other factors)....
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