Theory 2 and Empirical Tools - PAM2040 February2,2010...

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PAM 2040 February 2, 2010
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Social Welfare Government acts as “market monitor”  Need theory of how economy as a whole operates Social Welfare is the study of everyone’s aggregate  utility – wellbeing in society
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Equilibrium and Social Welfare - Market  Demand
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Demand Analysis Elasticity of Demand –  related  to slope Key Concepts: Inelastic vs. elastic demand
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Supply Side Firms are basically people: maximize profit (marginal  revenue = marginal cost) Production, cost functions that are usually much like  utility functions, budget constraints ( 29 ( 29 l k k kl l Q kl Q 4 2 1 2 / 1 2 / 1 = = = - wl rk TC + = TC PQ - = π
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Agents to Market -  Marginal Cost: How much does it cost a firm to produce  one more unit? In equilibrium in a perfectly competitive market, this is the firm’s  supply curve, since MC=price Individual Demand: How much are consumers willing to  pay for one more unit? Horizontal sum of firm’s supply= Market Supply  Horizontal sum of individual demand = Market Demand
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Market Equilibrium and Social  Efficiency Total Social Surplus: How much better off are  We, because of the market? TSS= Consumer Surplus + Producer Surplus P Q CS PS
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First Fundamental Theorem of Welfare  Economics In a perfectly competitive market, the  competitive equilibrium maximizes total social  surplus Any reduction in TSS is called  deadweight loss
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Market Equilibrium and Social  Efficiency
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This document was uploaded on 10/26/2011 for the course PAM 2040 at Cornell University (Engineering School).

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Theory 2 and Empirical Tools - PAM2040 February2,2010...

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