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

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Published on 23 Sep 2016
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
- 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:
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