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Surplus 25 price 20 15 10 5 0 s mc total revenue 5 10

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Unformatted text preview: = MC Total revenue 5 10 Cost of making pizza Quantity An Efficient Market Price (dollars per pizza) 25 20 15 Consumer surplus S Marginal cost (opportunity cost) of pizza Marginal benefit (value) of pizza Consumer's 10 expenditure = Producer Producer's Efficient quantity surplus of pizzas revenue D 0 5 Quantity (thousands of pizzas per day) 10 15 20 Is the Competitive Market Efficient? At the competitive equilibrium, marginal benefit to consumers of last unit purchased = marginal cost to producers of supplying that last unit. Resources are being used efficiently. At the competitive equilibrium, the sum of consumer surplus and producer surplus is maximized. Underproduction Price (dollars per pizza) Consumer surplus falls 25 20 15 10 5 0 5 If reduce output from 10 to 5 pizzas 10 15 20 ...but loss exceeds gain: this is the deadweight loss S Producer surplus grows D Quantity (thousands of pizzas per day) Overproduction 25 Price (dollars per pizza) 20 15 10 5 0 Consumer surplus increases Overall there is a deadweight loss S And producers suffer losses If increase output from 10 to 15 pizzas D 10 15 20 producer surplus falls 5 Quantity (thousands of pizzas per day) Sources of Inefficiency Price ceilings and floors Taxes, subsidies, and quotas Monopoly Public goods External costs and benefits High transaction costs When the market is prevented from working efficiently there is underproduction or overproduction Is the Competitive Market Fair?...
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