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ECO100 - OCT 17

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James Pesando

4.2 “Willingness to Pay” and Steplike Demand Curves 4.3 Linear Demand Curves 5. Producer Surplus ● “Steplike” supply curve ○ 1) Text, Figure 7.4 and 7.5 (152-153) ○ 2) Sole purpose is to illustrate numerical examples of producer surplus ○ 2) Reading assignment (will not be tested) ● PS: Area below price and above supply curve ● Producer surplus measures the benefit to suppliers of participating in a market ● Example (House Painters) ○ 1) Market wage is 20 per hour ○ 2) Individual B will work for 15 per hour ○ 3) Individual B has producer surplus of 5 per hour ○ 4) Individual B would be willing to pay (up to) $5 per hour to participate in this market (i.e, to be able to earn the market wage of 20 per hour) ■ Worse off if he can’t participate in the market ● Total surplus = Consumer surplus + Producer surplus ● Key Result: Equilibrium in a competitive market maximizes total surplus, we then say, competitive market is (allocatively) efficient. ○ To left of QE, value to buyer > cost of seller => efficient to increase output ○ To right of QE, value to buyer < cost of seller => efficient to reduce output ○ Only efficie
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