Lecture+16 - Announcements Today through the Monday after...

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Announcements Today through the Monday after break we will be doing chapter 8. HW for ch 7 due tomorrow night. Of course there is class on Friday.
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Benevolent Dictator Suppose I am a benevolent dictator and I am trying to figure out how much of a good to make and how much to charge for it. My goal is to do what’s best for society. I want to maximize total surplus (like the utilitarians).
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Important for this analysis: Remember, all of these cost curves can be thought of as “cost to society” curves, not just “cost to the firm” curves. Also, the market or societal demand curve tells us how much value society puts on this product. It tells us how much society is willing to pay at each quantity. A society’s demand curve gives that product’s “benefit to society” So what are my options when considering how much of something to produce and how much to charge? NOTE: In any market, we must ALWAYS be on our demand curve or else a shortage or surplus will exist.
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Shoe factory P Q D AVC AC MC Q 0 Q 1 Q 3 Q 2 P 0 P 1 P 2 P 3 MC 2 Here, we minimize variable costs Here, we minimize total costs Here, we maximize consumer surplus Here, we set benefit=cost P 4
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What’s best for society? • At P 3 , Q 3 , price=marginal cost (P=MC) So the benefit to society is equal to the cost to society for this good. This is efficient. Just enough resources are being put into making this good. This is the best point at which to operate, from society’s standpoint. Note that is does not maximize consumer surplus (but it does maximize TOTAL
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Socially optimal output If the marginal benefit > marginal cost, more shoes should be produced. If the marginal benefit < marginal cost, fewer shoes should be produced. If the marginal benefit = marginal cost, you’ve found the socially optimal number of shoes to produce. This occurs where MC intersects the demand curve and is the Efficient allocation of resources spent on making shoes.
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What a firm WILL do So we know what a firm SHOULD do to be socially “efficient” (Set Q such that MC=P) But firms don’t maximize social welfare, they maximize profits. Next we’ll look at what a firm WILL do. To do this, we have to state some rules about how the market operates. The first thing we do (and the easiest) is to assume that the market is “perfectly competitive” – read ch 8.
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PERFECT COMPETITION Chapter 8
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THE PRODUCTION PROCESS: THE BEHAVIOR OF PROFIT-MAXIMIZING FIRMS Perfect Competition perfect competition An industry structure with many
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This note was uploaded on 12/06/2011 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture+16 - Announcements Today through the Monday after...

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