Chap7 - Chapter 7 Efficiency and Exchange Qualification(In a perfectly competitive market without externality Review Concept of Surplus Consumer

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Chapter 7: Efficiency and Exchange Qualification: (In a perfectly competitive market without externality)
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Review: Concept of Surplus Consumer surplus : the difference between the most a buyer would have been willing to pay for a product and the amount it actually costs her. Producer surplus : the difference between what a company gets paid for the goods it sells, and the smallest amount it would have been willing to accept for them. Total economic surplus : the sum of consumer surplus and producer surplus for all buyers and sellers in a market. It is a measure of the total amount by which they benefit from their participation in that market.
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Market for heating oil Price ($/gal) Quantity (1000s of gals/day) D S 1.50 3 Producer surplus=$2250/day Consumer surplus=$2250/day 6 3
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Efficiency and Equilibrium A situation is efficient if total economic surplus is maximized. A situation is Pareto Efficient if no change is possible that will help some people with harming others. A market equilibrium (in a perfectly competitive market and without externality) is efficient because it maximized total surplus. When a market is not in equilibrium (market price is either below or above the equilibrium price), a transaction can always be made to make at least some people better off without hurting others.
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2.50 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 2.00 1.50 1.00 .50 D S When market price is below the equilibrium price
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2.50 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 2.00 1.50 1.00 .50 D S When market price is above the equilibrium price
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Observations on Equilibrium and Efficiency When price is above or below the equilibrium, the quantity exchanged will be below the equilibrium. The vertical value on the demand curve (marginal benefit, MB ) is greater than the vertical value on the supply curve ( MC ). Only the equilibrium will maximize economic surplus, where MB=MC for the last unit exchanged.
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Efficiency and Equality Efficiency does not necessarily eliminate poverty or bad things. Although efficiency is not our only goal (equality
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This note was uploaded on 09/17/2011 for the course ECO 108 taught by Professor Wolman during the Spring '08 term at SUNY Stony Brook.

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Chap7 - Chapter 7 Efficiency and Exchange Qualification(In a perfectly competitive market without externality Review Concept of Surplus Consumer

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