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Lecture

Notes_for_Chapter_5.doc

7 Pages
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Department
Economics
Course Code
ECON 103
Professor
Vera Lantinova

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Fraser International College ECON1034 “Principles of Microeconomics” Chapter 5: Efficiency and Equity THE KEY CONCEPTS in this chapter: - marginal social benefit - marginal social cost - consumer surplus (individual and market) - producer surplus (individual and market) - efficiency - deadweight loss - fairness Recall the scarcity problem: 1.Scarcity arises when resources are not efficient to meet the demand of the society. 2.A good which is a scarce has a value. 3.if a scarce good is given in free people will run out of it. How do markets answer the scarcity problem? 1.What to produce? Refers to what type of goods and services to produce which have demand in the market and or desired. 2.How to produce? Make choices about what resources to use, in what quantities, efficiently or not. 3.For whom to produce? Refers to how the total output is to be divided among different consumers. 1 Solving the scarcity problem through markets is just one of many possible ways. Do markets do a good job? Do markets solve the scarcity problem in the social interest? Sometimes don’t as the market only produce those goods for what the people are willing and able to pay or through Price Mechanism ,So the persons who are not able to pay for the good are excluded so thus it does not count into Social Interest. The markets would solve the scarcity problem in the social interest if the market outcome is: - efficient, and - fair Resources and goods are allocated efficiently if No one can be made better off without making someone else worse off. Efficiency :MSC=MSB In other words, efficient allocation is achieved when marginal benefit is equal to marginal cost. If we can show that at the market equilibrium marginal benefit is equal to marginal cost, then we will show that the market is efficient.  Recall: marginal benefit is Is the additional benefit of doing a activity  Recall: relationship between marginal benefit and individual demand 2 Individual demand and market demand Is the demand of a persosn while Market demand is the demad of society as a whole. The market demad is the horizontal sum of the individual demad curves and is formed by adding the quantities demaded by all the buyers. Market demand is the marginal social benefit. As the individual demad is marginal benefit so the Market demad is social benefit. Consumer surplus - individual consumer surplus - Consumer Surplus is a measure of the welfare that people gain from consumption of goods and services. - Consumer surplus is the difference between the price he is willing to pay and what he actually pays. - consumer surplus for the market It is the sum of all individual consumers. 3 Recall: marginal cost is
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