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Eco 9-26-07 - Econ 1 Demand Exchange and Equilibrium a...

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Econ 9/26/07 1. Demand, Exchange, and Equilibrium a. Exchange w/out production Method 1 (See Method 1 graph) i. Assume Darlene gets 20 eggs every week ii. The person with more than they want will keep selling until the marginal value and the price are equalized. 1. You eventually get to the point where: MV N =P=MV D 2. Total Revenue= quantity sold* revenue 3. Consumer Surplus= Qd*Pqo * (1/2) 4. Producer Surplus= TR-TV seller iii. Bother parties are better off through exchange 1. Gains from trade are maximized 2. We can think of the trading as being EFFICIENT a. To be efficient, the gains from trade must be maximized iv. Theorem of Exchange : At the margin, all gains from trade are maximized. 1. Equilibrium (Eqm) a. Important to note: i. There is no third party involved in reaching this point of efficiency 1. Adam Smith v. How do we know that price = 10? 1. Flip one demand curve and overlap the two. 2. Where the 2 meet is the market price vi. ***Note: 1. This only works when there’s no production 2.
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