AEM 2300 Lecture Notes - Lecture 6: Perfect Competition, Market Power, Economic Surplus

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Producer surplus rises (area between price lines to the left of supply curve). Consumers gain the area below the demand curve and between the price lines. Producers lose area between the price lines and to the left of the supply curve (-c) Large country net welfare gains (b+d) can be decomposed: exporter and importer gains. Es depends on domestic elasticity of supply. The more inelastic, a change in price will elicit a smaller change in supply compared to a more elastic curve. Change in domestic supply affects export supply. Ex. a more elastic domestic s implies more elastic es curve. With a more elastic s-curve, price doesn"t have to rise as much to generate same q* supplied, or same q* exported = exporting country loses a bit of their gain. More inelastic demand = basic goods (ex. rice) More elastic demand = luxury goods (ex. Ex. more inelastic domestic d-curve leads to more inelastic ed-curve.

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