Eco 10-1-07 - consumer surplus e Now assume 2 of Mork’s...

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Econ notes 10/01/07 1. Exchange w/out production a. Product i. Fixed amount in supply 1. Everyone is endowed w/ a certain number of units of the resource a. Supply curve is Inelastic because the supply is the same no matter the price b. Putting the market supply and market demand together: i. If demand is less than market demand, there is a surplus ii. If demand is greater than market demand, there is a shortage 1. (See Market Supply and demand w/out production) iii. When p<p*, quantity demanded will increase beyond the capacity of suppliers to provide, so there will be a shortage. c. Supply and Demand: Shifting Curves i. Example!!! 1. 2 people in the market, Mork and Mindy a. Both own and consume houses b. With market demand, Mork enters the market at whatever price his personal demand curve begins at. c. (See Market Supply and Demand Example) d. At P*, MV for rooms/ houses for both Mork and Mindy is equal to the price. i. At P*, no allocation of houses could increase the total
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Unformatted text preview: consumer surplus e. Now, assume 2 of Mork’s houses burned down. i. Would Mork buy 2 of Mindy’s houses? 1. This would shift the market supply to the left 2. This would raise the market price a. Mindy would buy 1 less house; Mork would only buy 1 house. 3. After the fire, Mark has less consumer surplus than he had before 4. So what about Mindy? a. She has a small producer surplus as a result of Mork’s misfortune b. Before, she didn’t have any producer surplus d. In summary, a market equilibrium doesn’t just mean that total amount supplied also happens to equal the total amount demanded (market demand) i. In addition, every individual in the market is also in equilibrium ii. Each consumer sets their marginal value equal to the price and every consumer is content to stay in this quantity because it maximizes their utility and maximizes the gains from trade...
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