Lecture18(20051117) Class today p167-179 列 Chapter 7: Efficiency and Exchange Slide 1
MB MC Chapter 7: Efficiency and Exchange Slide 1 Lecture 18 (2005.11.17) ◼ Class today p167-179
H Efficiency and Exchange C村APTR MB MC
MB MC Efficiency and Exchange
Overview a Chapter 7 develops the concept of efficiency and explores why many tasks are best left up to the market presents the concept of economic surplus in detail and looks at how unregulated markets can generate the largest possible economic surplus Chapter 7: Efficiency and Exchange Slide 3
MB MC Chapter 7: Efficiency and Exchange Slide 3 Overview ◼ Chapter 7 develops the concept of efficiency and explores why many tasks are best left up to the market. It presents the concept of economic surplus in detail and looks at how unregulated markets can generate the largest possible economic surplus
Overview a The chapter also discusses why intervention in the market can lead to undesired or unintended consequences however, social justice is distinguished from efficiency Finally, the chapter discusses how intervention in a market can lead to increased economic surplus Chapter 7: Efficiency and Exchange Slide 4
MB MC Chapter 7: Efficiency and Exchange Slide 4 Overview ◼ The chapter also discusses why intervention in the market can lead to undesired or unintended consequences; however, social justice is distinguished from efficiency. ◼ Finally, the chapter discusses how intervention in a market can lead to increased economic surplus
Review concepts Consumer surplus S Producer surplus .Economic surplus D Equilibrium Price .Equilibrium quantity Quantity) Chapter 7: Efficiency and Exchange Slide 5
MB MC Chapter 7: Efficiency and Exchange Slide 5 Producer surplus Consumer surplus D S Review concepts Quantity) Price •Economic surplus •Equilibrium Price •Equilibrium quantity
Market Equilibrium and Efficiency a(Poreto) Efficient A situation is efficient if no change is possible that will help some people without harming others What do you think? Are markets always efficient and equitable? Chapter 7: Efficiency and Exchange Slide 6
MB MC Chapter 7: Efficiency and Exchange Slide 6 Market Equilibrium and Efficiency ◼ (Poreto) Efficient A situation is efficient if no change is possible that will help some people without harming others. ◼ What do you think? ⚫ Are markets always efficient and equitable?
Market Equilibrium and Efficiency aAmarket equilibrium is efficient If price and quantity take any other than their equilibrium values, a transaction that will make at least some people better off without harming others can always be found Chapter 7: Efficiency and Exchange Slide 7
MB MC Chapter 7: Efficiency and Exchange Slide 7 Market Equilibrium and Efficiency ◼ A market equilibrium is efficient ⚫ If price and quantity take any other than their equilibrium values, a transaction that will make at least some people better off without harming others can always be found
A Market in Which Price Is Below the Equilibrium Leve 2.50 2.00 s 1.50 1.00 3 4 Quantity(1,000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 8
MB MC Chapter 7: Efficiency and Exchange Slide 8 A Market in Which Price Is Below the Equilibrium Level 2.50 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 2.00 1.50 1.00 .50 D S
How EXcess Demand creates an Opportunity for a Surplus-Enhancing Transaction 2.50 If P= $l then Qs = 2,000 2.00 gallons/day At 2,000 gallons the consumer is willing to pay $2 and the MC=$1 61.50 If the buyer pays $1. 25for an extra gallon, producer is $ 25 1.25 better off. and the consumer is 1.00 $.75 better off, or economic surplus increases by $1.00 At $1, the market is not efficient 3 4 Quantity(1,000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 9
MB MC Chapter 7: Efficiency and Exchange Slide 9 How Excess Demand Creates an Opportunity for a Surplus-Enhancing Transaction 2.50 Quantity (1,000s of gallons/day) Price ($/gallon) D S 1 2 3 4 5 2.00 1.50 1.00 .50 1.25 • If P = $1 then QS = 2,000 gallons/day • At 2,000 gallons the consumer is willing to pay $2 and the MC = $1 • If the buyer pays $1.25 for an extra gallon, producer is $.25 better off, and the consumer is $.75 better off, or economic surplus increases by $1.00 • At $1, the market is not efficient
How Excess Supply Creates an Opportunity for a Surplus-Enhancing Transaction 2.50 .If P= s2 then Qn =2,000 2.00 gallons/day 31.75 . Additionaloutput costs only $1 s This is $1 less than a buyer would 1.50 pay if the buyer pays the seller $1.75, the buyer gains an economic 1.00 surplus of $0. 25 then the seller gains an economic surplus of 075 5 Quantity(1,000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 10
MB MC Chapter 7: Efficiency and Exchange Slide 10 How Excess Supply Creates an Opportunity for a Surplus-Enhancing Transaction Quantity (1,000s of gallons/day) Price ($/gallon) D S 1 2 3 4 5 2.50 2.00 1.50 1.00 .50 1.75 •If P = $2 then QD = 2,000 gallons/day •Additional output costs only $1 •This is $1 less than a buyer would pay •If the buyer pays the seller $1.75, the buyer gains an economic surplus of $0.25 then the seller gains an economic surplus of $0.75
