Chapter 8 - Efficiency of Perfect Competition

Chapter 8 - Efficiency of Perfect Competition - Supply P =...

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Chapter 8 Efficiency Perfect Competition
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Production of the mix of goods people want the most Pareto Efficiency Marginal Social Cost = Marginal Social Benefit Three Aspects of Economic Efficiency
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The mix of goods people want the most Consumer Surplus Producer Surplus S P D
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D P S Underproduction DWL
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S P D Overproduction DWL
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Q S {MC = W/MPL} P D {MB} MSC = MSB P Q
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MC = $40 Wheat Farmer Pays Barley Farmer Loses $40 of benefit
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Q S P D Pareto Efficiency 10 MB = $15 MC = $5 6
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Condition for Allocative Efficiency P = MC And, no market failure
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Market Failure The Failure of the Market to Achieve Allocative Efficiency Private Incentives ≠ Public Interest Externalities Market Power Public Goods Asymmetric Information
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Adjustment Process to Long Run Equilibrium Keep in Mind: 1. Show me the money 2. You are not alone The reason for entry and exit is economic profit. In the long run, firms in a perfectly competitive industry earn only a normal profit.
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Π > 0 Entry
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Unformatted text preview: Supply P = 0 < 0 Exit Supply P = 0 Q S = MC = W/MPL P P 1 P 2 Remember LS = 0 > 0 = 0 Q S = W/MPL P D Adjustment Process: A Constant Cost Industry P Q = 0 LS > 0 = 0 Q P D Adjustment Process: An Increasing Cost Industry S = W/MPL S = W H /MPL = 0 LS > 0 = 0 Q P D Adjustment Process: A Decreasing Cost Industry S = W/MPL S = W/MPL S = W L /MPL Adam Smiths Invisible Hand It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Caution Market Failure Income Distribution Economic Progress Economic vs. Other Justifications for Policy...
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This note was uploaded on 11/08/2010 for the course ECN ECN 001A taught by Professor Scottcarrell during the Spring '10 term at UC Davis.

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Chapter 8 - Efficiency of Perfect Competition - Supply P =...

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