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Economics 1021A/B
Charles Middleton

Efficiency (Chapter 7) - Managerial Efficiency  Given k, L, and Tech, are you producing the maximum amount? ASSUME: YES. (otherwise you can’t model anything) - Welfare Efficiency  Maximize the welfare of society from the Production/Consumption of a good  Benefit comes from the consumption, not the production - Welfare or the Consumer + Welfare to the Producer = Welfare to Society - Maximize the welfare of society from the consumption and production of a good/service Consumer Surplus (Consumer Welfare) - Benefit that consumers receive that they do not pay for - What is the Amount of Consumer Surplus? The area of the triangle above the price line and below the demand curve  If Price drops, consumer surplus increases  If Price increases, consumer surplus drops Producer Surplus - Amount of revenue received that is greater than the minimum price required - Area below the price and above the supply curve  If Price increases, producer surplus increases  If Price drops, producer surplus decreases - Eg. If price drops:  Consumer gains a new section of the graph, but at the cost of the front of the triangle. The producer loses twice.  The triangle lost is called the “Deadweight loss to Society” Marginal Benefit - How we measure the benefit from a product - Additional benefit you receive from consuming 1 more unit - How is it determined? By how much you are willing to Pay MARGINAL BENEFIT CURVE is THE DEMAND CURVE - Can also measure benefit by using the term utility Marginal Cost - Additional cost of producing 1 more unit  Supply curve Society Maximization D = S = MB = MC Efficiency is Allocative As quantity increases, Marginal Benefit decreases As quantity increases, Marginal Cost increases D = S MB = MC (this is the efficiency criteria) Therefore, markets will be efficient because market will always (generally) produce where MB = MC Therefore, markets are efficient. *unless they are not* Market Failure - Markets no longer produce the efficient level 1. Government Regulations / Policy Note: in order to appear on diagram,  Government policy may be: social, economic, political quality, taste, etc. must be the same. a) Price Floor  A minimum price that the government sets  Ie. Keep prices from going down  Eg. Minimum wage  Price floor must be greater than equilibrium price  Eg. With inelastic demand, income rises, with elastic dem
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