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ECON 230D1 (30)
Chapter 9

ECON 230D1 Chapter 9: Summary
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Department
Economics (Arts)
Course
ECON 230D1
Professor
Irakli Japaridze
Semester
Fall

Description
Chapter 9: Applying the competitive model Zero profit for competitive firms in the long run - The firm may be willing to operate in the LR even tho it is making 0 economic profit because by looking at the opportunity cost, it may be making the normal business profit - - A firm could therefore shutdown if it was making 0 business profit When entry is limited because of a scare resource, firms make 0 eco profit because they are driving up the price of the rare input by all bidding for it - A firm has to maximise their profit if they want to survive, otherwise lose money and risk shutdown Consumer Welfare - Consumer welfare from a good is the benefit a consumer gets from consuming that good minus what the - consumer paid for the good The D curve reflects an individual’s marginal willingness to pay, meaning the max amount they will pay for an extra unit and depends on marginal value - Consumer surplus: the monetary diff between what a consumer is willing to pay and what the good costs • CS= marginal willingness to pay - what the consumer actually pays • It is the area under the D curve and above the market p up to the Q that the consumer buys • Utility is hard to compare and hard to measure - Effects of a p change: If S curve shifts upwards, equilibrium rises and reduces consumer surplus. • if D curve is relatively inelastic, individuals still buy that good, even when p goes up, so less surplus Producer Welfare - Producer surplus: the difference between the amount for which a good sells and the min amount necessary for the seller to be willing to produce the good - PS= R-VC, and graphically is the area above the S curve and below the market p up to the Q produced - PS-π=(R-VC) - (R-VC-F) = F. If F=0, then PS=π - PS can be used to measure the effect of a shock on all firms in a market Competition maximises welfare - Welfare=CS+PS - Deadweight loss: the net reduction in welfare from a loss of surplus by one gp that is not offset by a gain to another gp from an action that alters a market equilibrium - Happens because consumers value extra output by more tan the marginal cost of producing it - The DWL is also the opportunity cost of giving up some of this good to buy more of another good - It reflects a market failure: inefficient production or consumption, often cus of price exceeds MC Policies that shift S and D curves - Restricting the number of firms: causes a shift of the S curve to the left and raises eq P and lowers eq Q - Such regulations raises the earnings of the firms in the market - Permit owners are the only ones who benefit from restrictions, because unusual profit/rent paid forces AC to rise, hence = market P and therefore having no economic profit. - Raising entry and exit costs: by raising the cost to enter/exit, indirectly restricting entries - barrier to entry: an explicit restriction or a cost that applies only to potential new firms. (sunk costs) NB not costs of entry, which apply to everyone. - exit restrictions can exist, like laws that protect workers jobs, etc. mea
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