ECON-2006EG Study Guide - Quiz Guide: Marginal Cost, Market Distortion, Price Controls

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The invisible hand efficiently allocates goods and services to buyers and sellers. The invisible hand leads to efficient production within an industry. The invisible hand allocates resources efficiently across industries. There are trade-offs between making the economic pie as big as possible and dividing the pieces equally. Reservation value (willingness-to-pay values) is the price at which a trading partner is indifferent between making the trade and not doing so. An important outcome from buyers and sellers optimizing in perfectly competitive markets is that social surplus is maximized. Social surplus is the sum of consumer surplus and producer surplus. Consumer surplus is the difference between the buyers" reservation values and what the buyers actually pay. Producer surplus is the difference between the price and the sellers" reservation values (marginal cost). Social surplus represents the total value from trade in the market. For social surplus to be maximized, the highest-value buyers are making a purchase and the lowest-cost sellers are selling.

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