ECON 2100 Lecture Notes - Lecture 8: Laissez-Faire, Market Failure, Invisible Hand

19 views2 pages
Published on 23 Sep 2016
School
Department
Course
Professor
Chapter 7- Consumers, Producers, and the Efficiency of Markets Cont.
- Cost and the Supply Curve
A seller will produce and sell the good/service only if the price exceeds cost.
At each Q, the height of the S curve is the cost of the marginal seller, the seller who would leave
the market if the price were any lower.
Producer surplus (PS): the amount a seller is paid for a good minus the seller’s cost; PS=P-cost
Total PS equals the area above the supply curve under the price, from 0 to Q.
PS is the area b/w P and the S curve. PS = ½ x b x h
How a Lower Price Reduces PS-Fall in PS due to remaining sellers getting lower P & Fall in PS
due to sellers leaving market.
Total Surplus= CS+PS
The market’s allocation is efficient because it can maximize total surplus i.e. the social welfare.
- Evaluating the Market Equillibrium
Total Surplus= (value to buyers) – (cost to sellers)
- Does Equilibrium Q Maximize Total Surplus?
The market eq’m quantity maximizes total surplus:At any other quantity, can increase total
surplus by moving toward the market eq’m quantity.
- Free Market Vs. Government Intervention
The market equilibrium is efficient. No other outcome achieves higher total surplus.
Govt cannot raise total surplus by changing the market’s allocation of resources.
Laissez faire (French for “allow them to do”): the notion that govt should not interfere with the
market.
- The Free Market vs. Central Planning
To allocate resources efficiently and maximize total surplus, the planner would need to know
every seller’s cost and every buyer’s WTP for every good in the entire economy.
This is impossible, and is why centrally-planned economies are never very efficient.
Such market failures occur when:
find more resources at oneclass.com
find more resources at oneclass.com
Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Notes+

Unlimited access to class notes and textbook notes.

YearlyBest Value
75% OFF
$8 USD/m
Monthly
$30 USD/m
You will be charged $96 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.