ch10 - Chapter 10 Competitive Markets: Application s 1...

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1 Competitive Markets: Application s Chapter 10
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2 Chapter Ten Overview 1. Motivation: Agricultural Price Supports 1. Deadweight Loss A Perfectly Competitive Market Without Intervention Maximizes Total Surplus" 1. Government Intervention – Who Wins and Who Loses? 1. Examples of Various Government Polices Excise Taxes Price Ceilings and Floors Production Quotas Import Tariffs 1. Conclusions Chapter Ten
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3 Chapter Ten Definition: Economic Efficiency means that the total surplus is maximized. "Every consumer who is willing to pay more than the opportunity cost of the resources needed to produce extra output is able to buy; every consumer who is not willing to pay the opportunity cost of the extra output does not buy.“ "All gains from trade (between buyers and suppliers) are exhausted at the efficient point." The perfectly competitive equilibrium attains economic efficiency. Economic Efficiency
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4 Demand Supply Q P Q* P* A B C D Q 1 P d P s Chapter Ten Surplus Maximization in Competitive Equilibrium F G E
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5 Chapter Ten At the Perfectly Competitive Equilibrium, (Q*,P*), Total Surplus is maximized. Consumer's Surplus at (Q*,P*): ABC Producer's Surplus at (Q*,P*) : DBC Total Surplus at (Q*,P*): ADC Surplus Maximization in Competitive Equilibrium
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6 Chapter Ten Deadweight Loss Definition: A deadweight loss is a reduction in net economic benefits resulting from an inefficient allocation of resources. Consumer's Surplus at (Q 1 ,P d ): AEF Producer's Surplus at (Q 1 ,P d ) : EFGD Total Surplus at (Q 1 ,P d ): AFGD Deadweight Loss at (Q ,P d ): AFC
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7 Intervention Type Effect on (domestic) quantity traded Effect on (domestic) Consumer Surplus Effect on (domestic) Producer Surplus Effect on (domestic) Government Budget Is a (domestic) Deadweight Loss created? Excise Tax Falls Falls Falls Positive Yes Subsidies to Producers Rises Rises Rises Negative Yes Maximum Price Ceilings for Producers Falls; Excess Demand Rise or Fall Falls Zero Yes Minimum Price Floors for Producers Falls; Excess Supply Falls Rise or Fall Zero Yes Production
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ch10 - Chapter 10 Competitive Markets: Application s 1...

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