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Lecture

Oct 31 2013.docx

5 Pages
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Department
Economics
Course Code
ECO1104
Professor
David Gray

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ECO 1104 B Oct 31th, 2013 Halloween YUJIE YI #7038840 Figure 7-4 The Supply Curve  Producer surplus = the actual price received – the willingness to produce (and sell)  The area below the price yet above the supply curve measures the producer surplus in a market Figure 7-5: Measuring Producer Surplus with the Supply Curve - The height of the supply curve gives sellers willingness to produce  It is a measure of producer welfare, and it is 0 for the last unit produced and sold, and positive for all of the previously produced and sold units  An increase in price received raises the level of producer surplus, while a decreases lowers it Figure 7-6: How the PriceAffects Producer Surplus Market Efficiency Consumer surplus and producer surplus may be used to address the following question: - Is the allocation of resources determined by free markets in any way desirable?  Some would say no, while others would say of course Recall: CS = willingness of demanders to pay – requirement to pay Recall: PS = price received by producers – willingness of suppliers to supply Total surplus or social surplus = CS + PS = (willingness of demanders to pay – requirement to pay) + (price received by producers – willingness of suppliers to supply) - The middle 2 terms cancel out 1/5 TS = willingness of D to pay (value to buyers) – cost incurred by S Efficiency is the property of a resource allocation of maximizing the total surplus received by all members of society (MIDTERM) - Note how the welfare of consumers is weighted equally with the welfare of producers  Each economic actor, regardless of which side of the market that they are on, counts as one In addition to market efficiency, one might also care about equity – the “fairness” of the distribution of well-being among the various buyers and sellers - We won’t talk about the equity, we only care about the efficiency The next diagram shows the level of TS given a S & D equilibrium Figure 7-7: Consumer and Producer Surplus in the Market Equilibrium - Total Surplus = Consumer Surplus + Producer Surplus - Areas in the right aren’t being produce. The only relevant area is in the left (grey and orange) 3 Points Regarding Market Efficiency  The S & D equilibrium allocates the supply of goods to the buyers who value them most highly, as measured by their willingness to pay as reflected in the height of the D curve  At the same time, the S & D equilibrium allocates the demand for goods to the sellers who can produce them at least cost, as reflected in the height of the S curve  The S & D equilibrium consists of the quantity of goods that measures the sum of consumer and producer surplus, and is therefore efficient - As shown in the next graph, at lower levels of output, value to demanders > cost to suppliers, so more should be produced  Because the valuation of consumers’point of view is higher than the
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