Recall, the allocation of resources refers to the
question of who makes and gets what?
Welfare economics is the study of how the
allocation of resources affects economic wellbeing
First, we look at the well-being of consumers.
PW = the world price of a good,
the price that prevails in world markets
PD = domestic price without trade
If PD < PW,
country has comparative advantage in the good
under free trade, country exports the good
Two goods: pizza and Pepsi
A consumption bundle is a particular combination
of the goods, e.g., 40 pizzas & 300 pints of Pepsi.
Budget constraint: the limit on the consumption
bundles that a consumer can af
A market is any group of participants who have
the desire and ability to trade with each other.
We will consider markets that can be divided into
buyers and sellers, although in some real world
markets a participant may play both r
One type of market failure: externalities.
Externality: the uncompensated impact of
one persons actions on the well-being of a
the effect on bystanders is adverse
a market structure in which many firms sell
products that are similar but not identical.
A monopoly is a firm that is the sole seller of a
product without close substitutes.
In this chapter, we study monopoly and contrast
it with perfect competition.
The key difference:
A monopoly firm has market power, the ability