Lecture%208%20-%20Markets%20and%20Efficiency%20II

Lecture%208%20-%20Markets%20and%20Efficiency%20II - FIN...

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1 FIN 501: Financial Econoimcs Lecture 8: Markets and Efficiency II Professor Nolan Miller
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2 Announcements
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3 Last Time … Short Run Equilibrium and Long-run equilibrium. Markets and efficiency. Deadweight Loss. Efficiency loss from distortions.
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4 This time … More on distortions Minimum wage Taxes International Trade The flip side of distortions: money making opportunities Multiple Markets and General Equilibrium Fundamental Theorems of Welfare Economics Efficiency and Financial Markets
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5 Distortions Consider the Price Discrimination and Price Ceiling examples. Price Discrimination: efficient. Price Ceiling: inefficient (DWL). What accounts for the difference? In Price Discrim, Q *  units are still exchanged. In Price Ceiling, Q M  < Q * . This “distortion” of the quantity exchanged leads to the DWL. Another policy: price floor/minimum wage. The government imposes a minimum wage above the market-clearing  wage. What will this do to the market? Will there be a DWL?
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6 Impact of Minimum Wage Q* Q Consider the impact of imposing a  minimum wage. Here, S is the supply of labor, D is  the demand for labor. The price is the wage rate, w. Suppose that a minimum price  w MIN >w *  is imposed on this  market. Quantity is reduced from Q to Q M . What happens to CS, PS, TS? Q M w D S w* w MIN
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7 Impact of Minimum Wage Q* Q Before Minimum Wage: CS = A + B + C PS = D + E After Minimum Wage: CS = A PS = B + D Change: ΔCS = - B - C ΔPS = - E + B DWL = C + E Area B is transferred from consumers to  producers. C + E is lost because Q decreases  (fewer people are employed). Q M w D S w* w MIN A B D C E
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8 Impact of Minimum Wage Q* Q The minimum wage has two effects on  workers: Some people lose their jobs. Those who are still employed make more  money. The DWL comes from the first effect, and  its magnitude depends on the elasticity  of demand. If Demand is perfectly inelastic, then the  wage rises and there is no reduction in  employment. w D S w* w MIN
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9 Article: Teenage Jobless Rate Reaches Record High   (New York Times, Sept. 4, 2009). In a labor market, Firms are the Demanders, and Workers are the Suppliers. Firms demand labor up to the point where the marginal revenue product of  labor equals its marginal cost. Marginal Revenue Product = p MP
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Lecture%208%20-%20Markets%20and%20Efficiency%20II - FIN...

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