Week 5 Competitive markets

Week 5 Competitive - Competitive Markets(TF Chapter 7 1 Last week Utility and profit Marginal benefit and the demand curve Marginal cost and the

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Competitive Markets (TF Chapter 7)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Last week… Utility and profit Marginal benefit and the demand curve Marginal cost and the supply curve Consumer and producer surplus An efficient market maximises consumer and producer surplus
Background image of page 2
3 Today’s Agenda Why are competitive markets efficient? Sources of inefficiency (market failure) Deadweight loss The effects of a price floor and a price ceiling The effects of taxes and subsidies The incidence of a tax and elasticity Deadweight loss and elasticity
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 The Invisible Hand Adam Smith - Wealth of Nations in 1776 A participant in a competitive market is “led by an invisible hand to promote an end which was not part of his intention.”
Background image of page 4
5 Producer surplus Consumer surplus Quantity (thousands of pizzas per day) 0 5 10 15 20 Price (dollars per pizza) S 5 10 15 20 25 D An Efficient Market for Pizza
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Efficiency requires… 1. MB = MC for the last item produced 2. MC of a good should be equal for every producer 3. MB of consuming the good should be equal for all consumers
Background image of page 6
7 Market Efficiency Recall: CS = MB – P PS = P – MC Total Surplus = CS + PS As a result: TS = MB - MC
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Market Efficiency Total surplus is the value to consumers minus the cost to producers. Total surplus is maximised at the equilibrium market price Goods and services are produced by the firms with the lowest opportunity costs of production… …and are consumed by buyers with the greatest willingness to pay for them
Background image of page 8
9 Pareto Efficiency An outcome is Pareto efficient if it is not possible to make someone better off without making someone else worse off.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 Deadweight Loss (DWL) Deadweight loss is the decrease in consumer and producer surplus that results from an inefficient allocation of resources
Background image of page 10
11 Quantity (thousands of pizzas per day) 0 5 10 15 20 Price (dollars per pizza) S 5 10 15 20 25 D Underproduction Efficient output If output is reduced to 5,000 Deadweight loss
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
12 Deadweight loss Quantity (thousands of pizzas per day) 0 5 10 15 20 Price (dollars per pizza) D S 5 10 15 20 25 Overproduction If output is increased to 15,000 pizzas
Background image of page 12
13 Sources of Inefficiency (that we will discuss today) Price controls Price ceilings Price floors Taxes and subsidies
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Sources of Inefficiency (that we will discuss later) Quotas A quota is a restriction on the maximum quantity a firm can produce and sell
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/18/2011 for the course ECON 1001 taught by Professor - during the Three '07 term at University of Sydney.

Page1 / 53

Week 5 Competitive - Competitive Markets(TF Chapter 7 1 Last week Utility and profit Marginal benefit and the demand curve Marginal cost and the

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online