MicroEconomics - Lecture 4

MicroEconomics - Lecture 4 - Welfare Economics Do the...

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Welfare Economics Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? Welfare Economics is the study of how the allocation of resources affects economic well- being. Whether the market allocation is desirable can be addressed by welfare economics. Question: Does equilibrium in the market result in maximum benefits, i.e., maximum total welfare, for both the consumers and the producers of the product? 1. Basic Concepts Willingness to pay Consumer Surplus; measures economic welfare from the buyer’s side. Producer Surplus; measures economic welfare from the seller’s side. Total (social) surplus Efficiency and Deadweight Loss 2. Consumer Surplus Willingness to pay is the maximum amount that a buyer will pay for a good. It measures how much the buyer values the good or service. Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it. 1. Everyone buys either one unit of a product or does not buy at all. Who values the product most? Least? 2. Multi-Unit consumption is allowed. I would buy 1 apple if price= $5 I would buy 2 apples if price= $4 I would buy 3 apples if price= $3 If the current market price is $3 and I buy 3 apples, how much do I gain? The market demand curve depicts the various quantities that buyers would be willing and able to purchase at different prices. The area below the demand curve and above the price measures the consumer surplus in
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This note was uploaded on 04/09/2008 for the course ECON 2106 taught by Professor Minjaesong during the Fall '06 term at Georgia Institute of Technology.

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MicroEconomics - Lecture 4 - Welfare Economics Do the...

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