301lec17-18

301lec17-18 - Lecture Notes 17-18 Econ 301 Professor...

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Lecture Notes 17-18 Econ 301 Professor Severinov Market Equilibrium, Efficiency, Welfare, Deadweight Loss, Government Regulation
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Consumer 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 consumer A receives a net gain from buying the product-- consumer surplus. Producer Surplus 3 Q D Q S
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Review: Benefits of Exchange in Equilibrium Consumer surplus- is the net benefit that the consumers receive. It is equal to the valuations for the good (demand curve reflects values) minus what they pay for the good. Consumer surplus is measured by the area between the demand curve and the market price Producer surplus- is the total benefit to the firms-producers. It is equal to revenue that producers receive minus their variable costs. Producer surplus is measured by the area between the supply curve and the market price
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Welfare and Efficiency of a Market The Efficiency of an Economy is measured by Total Welfare= Total Surplus= Consumer Surplus +Producer Surplus , (i.e. the total pie. ) Efficient economy is such that maximizes total welfare (surplus), i.e. delivers the largest possible pie.
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The Efficiency of a Competitive Market Left to itself, competitive market attains efficiency, i.e. maximize total surplus. Caveats: we will study conditions when markets fail to do so. Efficiency Loss: markets which do not attain economic efficiency have a deadweight loss.
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Consumer and Producer Surplus In a competitive equilibrium, maximal amount of welfare=producer +consumer surplus is realized. Total welfare is equal to the sum of yellow and blue areas. Consumer Surplus Quantity Price S D Q 0 5 9 Producer Surplus 3 Q D Q S
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Welfare effects of Government Policies Welfare Effects of Policies are: Gains and losses to producer surplus and consumer surplus from the policies To determine the welfare effect of a governmental policy, we can measure the gain or loss in consumer and producer surplus
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Types of Government Regulation and Interference into Markets: Price Ceiling Price Floor such as Minimum Wage Price Support: via government purchases (agriculture) Production Quotas (airlines, taxis) Subsidy to Producers ($x per unit) Subsidy to Consumers
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Types of Government Regulation and Interference into Markets: Taxes: per unit or per $, on consumption or production International Trade: Quotas and Tariffs VRA: ``voluntary’’ restraints on trade
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301lec17-18 - Lecture Notes 17-18 Econ 301 Professor...

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