ECO 211 Chapter Notes - Chapter 7: Gross Domestic Product, Market Distortion, Planned Economy

• School: University of Miami
• Department: Economics
• Course: ECO 211
• Professor: Dr.Spigelman

Document Summary

Reservation value--the price at which a trading partner is indifferent between making the trade & not doing so. Equilibrium price when market demand & market supply curves intersect. Social surplus/welfare--the sum of consumer surplus & producer surplus. When buyers & sellers optimize in perfectly competitive markets, welfare is maximized. For maximization of welfare, highest-value buyers are making a purchase & lowest-cost sellers are selling, both are optimizing. If quantity sold is restricted, lower total surplus; same with forced increased output, seller"s forced output leads to a loss for them. Also interested in who gets what, the allocation of surplus, & at competitive equilibrium nobody can be made better off without harming someone else. Pareto efficient--outcome where no individual can be made better off without making someone else worse off, happens at competitive market equilibrium. Therefore, at competitive market equilibrium, goods & services are efficiently allocated to buyers. Invisible hand from the individual to the firm.