ECON 103 Lecture Notes - Pareto Efficiency, Economic Surplus, Economic Equilibrium
13 Jan 2022
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Theorem of exchange: all gains are exhausted at margin and in equilibrium there are no gains to be had by moving. The sum of consumer and seller surplus is called the gains from trade. Voluntary exchange is good because: both parties are made better off, total gains from trade maximized, a direct implication of our first principle (maximization). There are two ways to find how this market price is determined. The first method is works nicely when there are only two people trading and it is worth considering because it provides a lot of intuition about the concept of supply . The second method is more conventional and easily handles any number of traders. Within this second approach we create a model call market demand and supply. If we see here in the graph, we can use the technique of rotating the graph to determine the equilibrium price and quantity.
