CS 11 ECON EFFICIENCY

CS 11 ECON EFFICIENCY - Before Price Control After Price...

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CLASS SUPPLEMENT # 11 ECONOMIC EFFICIENCY (Page 1 of 2) Perfect Competition leads to “Economic Efficiency.” Economic Efficiency has two components: 1. Productive Efficiency: The least-cost method of pdn is used (the cost curves are as low as possible) Pdn is at the Q where ATC is minimized. 2. Allocative Efficiency: Pdn is at the Q where P = MC Total Market Surplus (TMS) is maximized. TMS = TCS + TPS C The gain from trade to all participants. C It is maximized at equilibrium without any price controls. C At equilibrium all gains have been exhausted, i.e, DWL = 0.
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Unformatted text preview: Before Price Control After Price Floor @ K Change due to Pr. Floor P Q TCS TPS TMS DWL CS #11 (Page 2 of 2) Before Price Control After Price Ceiling @ J Change due to Pr. Ceiling P Q TCS TPS TMS DWL DWL = Dead Weight Loss The gains from trade that are not realized because the market is unable to reach the free market equilibrium. These are gains that are lost to society as a whole. WEALTH TRANSFER Surplus transferred from one party to another, but not lost to society as a whole. D:\ECON202\CS\CS 11 ECON EFFICIENCY.wpd...
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CS 11 ECON EFFICIENCY - Before Price Control After Price...

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