An Introduction to Market Efficiency
-Legislated minimum wages make firms and some workers worse off, but benefits those workers who
retain their jobs
-Rent controls make some tenants better off at the expense of landlords (and harm other tenants)
-But how about the overall effect on society? Economists use the concept of…
Demand as "Value" and supply as "Cost"
-Price corresponding to a specific quantity demanded is the highest price consumers are willing to pay
-As shown by the height of the demand curve
-Price corresponding to a specific quantity supplied is the lowest price producers are willing to accept
-as shown by the height of the supply curve
Reinterpreting the supply curve
-For each pizza, the price on the supply curve shows the additional cost to firms of producing that pizza.
-Surplus: The difference between the quantity supplied and the quantity demanded.
-Consumer surplus: difference between what the consumer was willing to pay and what they actually
-Producer surplus: The difference between the price they sold the product for and the price they
expected to sell the product for.
-Total surplus: sum of consumer and producer surplus.
-Adam Smith: markets are made of self-interested consumers and producers. The invisible hand is what
leads to finding a balance between consumption and production. IF you have a market made up of these
people, you get the best possible outcome by letting these people interact.
-Economic surplus is maximized at the competitive equilibrium level of the output-the market is
-If equilibrium is found at the 250th pizza, for example, there is NO surplus on the sale of the 250th
surplus. If quantity sold is less than 240, there is less surplus. If the quantity sold is 260, there is negative
surplus on the last 10 pizzas.
-"Deadweight Loss" is the total loss of surplus caused by something (ex price floor).
-Price floor generates winners (producers) and losers (consumers)
-Output Quotas: Binding. Forces you to produce less than you would have in a free-market equilibrium.
Consumers now pay a higher price, so although producers had to reduce their quantity, their price
A Cautionary Word
-Government intervention in competitive markets redistributes surplus between buyer and sellers, but
often creates overall losses. So why do it?
-Government policy is often motivated by a desire to help a specific group (e.g. increase incomes of
-Economists must carefully analyze the effects of such policies to determine the actual effects rather
than what is desirable for political reasons. Chapter 16: Market Failures and Government Intervention
Basic Functions of Government
-The operative choice is between which mix of markets and government intervention best suits people's
hopes and needs
-When government's monopoly of violence is secure and functions with restrictions against its arbitrary
use, citizens can safely carry on their ordinary economic and social activities.
-Adam Smith: "The first duty of the sovereign is that of prot