Lecture6_

Lecture6_ - Market Equilibrium and Efficiency LECTU RE...

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Market Equilibrium and Efficiency LECTURE
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Slide 2 Market Equilibrium and Efficiency Market Equilibrium and Efficiency Does the free interaction of people in markets lead to a desirable social outcome?
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Slide 3 College Town Housing Market Quantity (1,000 apartments/month) Monthly Rent ($/apartment) 2,500 2 Supply Demand Is $2,500 more than what some people can afford? Suppose the supply and demand curves for two-bedroom College Town rental apartments are as shown:
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Slide 4 Assume the City Council is concerned that many students cannot afford the equilibrium rent of $2,500 per month and is considering a regulation forbidding landlords from charging more than $1,500. What will be the likely consequences of adopting this regulation? Regulated Rents
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Slide 5 Regulated Rents Monthly Rent ($/apartment) Quantity (1,000 apartments/month) 2,500 2 Supply Demand 3,500 Controlled = 1,500 1 3 0 Excess demand = 2,000 apartments per month Rent controls at $1,500 produce excess demand in the housing market
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Slide 6 Regulated Rents Monthly Rent ($/apartment) Quantity (1,000 apartments/month) 2,500 2 S D 3,500 Controlled = 1,500 1 3 0 With rent control, 1,000 apartments/month are placed on the market. At this quantity, there are tenants willing to pay as much as $3,500 for an apartment (= buyer’s reservation price ). At the same time, only some landlords are willing to supply apartments at this low price: those for whom the opportunity cost is only $1,500 (= seller’s reservation price ).
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Slide 7 Cash on the Table Monthly Rent ($/apartment) Quantity (1,000 apartments/month) 2,500 2 S D 3,500 Controlled = 1,500 1 3 0 The difference - $2,000 per apartment - represents Cash on the Table . It is the additional economic surplus that would accrue to any seller who could rent an additional apartment for the price that tenants would be willing to pay.
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Slide 8 Cash on the Table Mutually beneficial exchanges are always possible when a market is out of equilibrium. The buyer and the seller can both gain by agreeing to a price that is between their reservation prices. The buyer will gain because he pays less than his reservation price. The seller will gain since he receives a price that is higher than his reservation price.
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Slide 9 Cash on the Table When people have failed to take advantage of all mutually beneficial exchanges, there is “ cash on the table ”.
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Slide 10 Market Equilibrium and Social Optimality Is the market equilibrium always an ideal outcome for all market participants? The socially optimal quantity of any good is the quantity that maximizes the total economic surplus that results from producing and consuming the good.
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Social Optimality Recall Cost-benefit principle: Keep expanding production of the good as long as its marginal benefit is at least as great as its marginal cost. The socially optimal quantity occurs
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Lecture6_ - Market Equilibrium and Efficiency LECTU RE...

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