Economics-Chapter6,8,11 - Economics Chapter 6 Produce goods...

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Economics Chapter 6: Produce goods efficiently Efficient (Pareto-efficiency): a situation is efficient if no change is possible that will help some people without harming others, an economics state where resources are allocated in the most efficient manner, final allocation cannot be improved without harming others → does not imply equality or fairness (if nobody can be made better off without making someone worse off) → not without problems but not aiming for it is also bad A market equilibrium is efficient because when a market is not in equilibrium it is always possible to construct an exchange that helps some without harming others. When the price realized is either higher or lower than the equilibrium price, the quantity exchanged in the market will always be lower than the equilibrium quantity. In a competitive equilibrium: Demand: P=MU(D(P)) Supply: P=MC(S(P)) In equilibrium D(P*)=S(P*)=X* → MU(X*)=P*=MC(X*) Production in competitive equilibrium is Pareto-efficient! This is an instance of the First Welfare Theorem → Prices decentralize economic activity: Each economic actor looks only at prices when determining what to do Equilibrium prices coordinate economic actions at the right level If price < equilibrium, the quantity sold will be the amount that sellers offer → market = supply constrained If price > equilibrium, market is demand constrained → market equilibrium leads to the largest possible economic surplus Holds only with the following conditions: 1. Buyers and Sellers are well informed 2. Markets are perfectly competitive 3. The demand and supply curves satisfy certain other restrictions 4. Transaction costs are low Markets are efficient as they maximize economic surplus → does not mean 'good' Efficiency is important not because it is a desirable end in itself, but because it enables us to achieve all our other goals to the fullest possible extent. Whenever any market is out of equilibrium there is waste. The cost of preventing price adjustment: price ceilings → Given the cost (lost surplus) to producers and consumers asking them to pay higher taxes to finance transfers to the poor is an option that enables everyone to gain provided that the alternative is to impose price controls that would be even more costly than the income transfers. Price subsidies → give the poor additional money! First come, first served policies → The compensation policy is more efficient than the first come, first served policy because it establishes a market for a scarce resource that would otherwise be allocated by non-market means. The largest possible total economic surplus is achieved in private markets when goods are exchanged at equilibrium prices, where the value of the last unit to the buyer is exactly equal to the seller's marginal cost of producing it → Prices should reflect marginal cost Marginal cost pricing of public services (electricity) When a good is provided by a public utility from several sources, the marginal cost of serving a customer is the
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