AEM 250 Lec 7 Market Efficiency 9-10-10 sv

AEM 250 Lec 7 - Adam Smith and the Virtues of “Self Love”.k.a Self Interest(a a Se te est … man has almost constant occasion for help from

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Unformatted text preview: Adam Smith and the Virtues of “Self Love” .k.a. Self Interest) (a a Se te est) … man has almost constant occasion for help from his brethren, and it will be vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is to their advantage to do for him what he requires of them. hoever offers a bargain of any kind proposes to do this Whoever offers a bargain of any kind proposes to do this. Give me that which I want, and you shall have that which you want, is the meaning of every such offer; and it is in this manner that we obtain from another the far greater part of those good offices which we stand in need of. 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 terest We address ourselves not to their humanity but to 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.- The Wealth of Nations, 1776 Market Supply = Market Demand (P=0.75, Q=75) 2.25 2.50 .50 1.75 2.00 per kL arket Supply 1.00 1.25 1.50 ce $AU p Market Supply Market Demand 25 0.50 0.75 Pric 0.00 0.25 25 50 75 100 125 150 175 200 225 250 illion kL per Quarter Market Equilibrium is Where Market Supply Equals Market Demand Million kL per Quarter 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 ach unit decreases as quantity increases each unit decreases as quantity increases. Inverse Demand = Marginal Benefits Consumer Value and Consumer Surplus • Consumer value : The total value or simply value to consumers of using a product is measured by the area nder the inverse demand curve under the inverse demand curve. • Consumer surplus : the excess of consumer value above e cost paid by consumers for a product the cost paid by consumers for a product....
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This note was uploaded on 12/20/2010 for the course AEM 25 at Cornell University (Engineering School).

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AEM 250 Lec 7 - Adam Smith and the Virtues of “Self Love”.k.a Self Interest(a a Se te est … man has almost constant occasion for help from

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