EfficiencyandFairness

EfficiencyandFairness - Chapter5 Efficiency and Equity...

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Click to edit Master subtitle style 11 Chapter 5 Efficiency and Equity
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Course Outline {93B6C7DD-B656-4597-8DAF-0C35C7E5FCD7} Microeconomics troduction is Economics? Markets Work nd and supply tional Topics holds’ Choice Elasticity ncy and Equity t Actions in Markets s and Markets y and Demand references, and Choices onomic Problem put and Costs ct Competition Monopoly istic Competition Oligopoly 22
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Lecture Outline I. Efficiency 1) Definition, Example, Sufficient conditions 2) Is competitive market efficient and why 3) Alternative view – maximizing surplus a) Consumer Surplus and Producer Surplus b) Dead Weight Loss I. Application of Efficiency of competitive markets II. Equity/Fairness 33
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44 I.1 Efficiency n Efficiency means to produce the most valuable goods at minimal costs and allocate goods to those who value them the most. n Equivalently, an allocation is efficient when we cannot make one person better off without making another person worse off.
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55 I.1 Efficiency Example Two buyers MB Amy Bob MB(1) $10 $9 MB(2) $4 $7 MB(3) $0 $0
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66 I.1 Efficiency Example Two Sellers MC Chris Diana MC(1) $1 $3 MC(2) $2 $5 MC(3) $6 $8
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77 I.1 Efficiency Example Two buyers MB Amy Bob MB(1) $10 $9 MB(2) $4 $7 MB(3) $0 $0 Two Sellers MC Chris Diana MC(1) $1 $3 MC(2) $2 $5 MC(3) $6 $8 Hint: efficient allocation must maximize total surplus
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88 I.1 Conditions for Efficiency n An allocation in a market is efficient if q 1. All buyers have the same marginal benefit; n (Indivisible goods: any buyer’s benefit from one more unit is no more than any other buyer’s benefit from the last unit consumed.) q 2. All sellers have the same marginal cost; n (Indivisible goods: any seller’s cost to produce one more unit is no less than any other seller’s cost to produce the last unit sold.) q 3. Marginal cost equals marginal benefit. n (Indivisible goods: any seller’s cost to produce one more unit is no less than any buyer’s benefit from consuming one more unit.)
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99 I.2 Efficiency in Competitive market n Marginal benefit is measured by the maximum price that consumers are willing to pay for an additional unit of a good or service.
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