ECON 1000 Lecture 5: Chapter 5 Lecture

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30 Aug 2018
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Chapter 5: Surplus, Efficiency, and Deadweight Loss
1. Negative-sum, zero-sum, and positive-sum environments
a. Negative-sum environmenta situation in which the sum of gains and losses
over all people is negative in value
i. E.g. heads, I lose $10 and you win $8 ($2 is burned/wasted); tails, I win
$7, you lose $9 ($2 is burned)losses more than wins
b. Zero-sum environmenta situation in which the sum of gains and losses over all
people is equal to zero
i. E.g. heads, I lose $5, you win $5; tails, I win $3, you lose $3cancel each
other out
c. Positive-sum environmenta situation in which the sum of gains and losses over
all people is positive in value
i. E.g. heads, I lose nothing and you win $12; tails, I win $13, you lose
nothing
2. Win-win outcomes vs. win-lose outcomes
a. Win-win outcomean outcome for which all people are better off than they
would have been if the outcome were not realized (i.e. everybody wins)
i. Only positive in a positive sum environment
ii. Being in a positive sum environment does not guarantee that we will
realize a win-win outcome
b. Win-lose outcomesome are better off and some are worse off than they would
have been if the outcome was not realized (i.e. some people win, other people
lose)
c. Voluntary tradein free markets in a win-win outcome in that buyers and sellers
are both better off than they would have been if trade did not occur
i. Intuitionnobody is forcing anyone to trade
3. Buyer’s reservation pricemax dollar amount a buyer is willing to give up in order to
acquire an item
a. At any particular quantity demanded, the height of the demand curve illustrates
the “reservation price” of the buyer of that unit
4. Seller’s reservation pricemin dollar amount a seller is willing to accept in order to part
with an item
a. At any particular quantity supplied, the height of the supply curve illustrates the
“reservation price” of the seller of that unit
b. “Benefits (or surplus) from trade” will be based upon these reservation prices
5. Consumer’s surplus and producer’s surplus
a. Situation
i. Consider an item that a buyer values at rb=$22 and a seller values at
rs=$12
1. Transfer of ownership (i.e. do not worry about the money that is
trading hands) makes the buyer $22 better off and makes the
seller $12 off (the sum of their gains/losses is $22-$12=$10,
positive sum)
ii. Suppose they agree to trade at a price of p=15
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