13-Perfect Competition (III)

13-Perfect Competition (III) - Agenda Course Overview...

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1 Agenda • Course Overview • Efficiency of Perfectly Competitive Markets • Market Intervention • Taxes and Subsidies • Policies designed to raise prices • Import tariffs and quotas • What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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2 Agenda • Course Overview • Efficiency of Perfectly Competitive Markets • Market Intervention • Taxes and Subsidies • Policies designed to raise prices • Import tariffs and quotas • What To Take Away Cost-Benefit Analysis of Markets Consumer surplus is the total benefit or value that consumers receive beyond what they pay for a good. Producer surplus is the total benefit or revenue that producers receive beyond what it costs to produce a good. Aggregate surplus is the total benefit from consumption and production and is given by the sum of consumer surplus and producer surplus. Between 0 and Q 0 producers receive a net gain from selling each product-- producer surplus. Consumer Surplus Quantity Price S D Q 0 5 9 Between 0 and Q 0 consumers receive a net gain from buying the product-- consumer surplus. Producer Surplus 3 Q D Q S
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3 The efficiency of a Competitive Market In the evaluation of markets, we often talk about whether it reaches economic efficiency, i.e. the maximization of aggregate consumer and producer surplus. A competitive market outcome generates a number of transactions between consumers and producers. We could ask ourselves if we can improve the total benefits created (“gains from trade”) by changing the parties and amount of these transactions: Every producer that is not selling faces a marginal cost for an extra unit that is higher than the valuation for that unit of the marginal consumer. Every consumer that is not buying one extra unit has a valuation for this unit that is lower than the marginal cost of producing this unit. Competitive market outcomes are efficient: all gains from trade are exhausted. Agenda • Course Overview • Efficiency of Perfectly Competitive Markets • Market Intervention • Taxes and Subsidies • Policies designed to raise prices • Import tariffs and quotas • What To Take Away
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4 Market Intervention Competitive markets are economically efficient. When markets do not allocate resources efficiently (“market failure”) government intervention may be able to increase efficiency. However a government may seek to intervene in markets (where no obvious inefficiency is present) to achieve other societal goals: Raise revenue to fund public initiatives Favor a specific group/industry Market intervention imposes an efficiency cost to society. This efficiency cost (“deadweight loss”) will be measured by the total change in aggregate
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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13-Perfect Competition (III) - Agenda Course Overview...

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