Chapter 9 Notes.docx

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University of Toronto Scarborough
Economics for Management Studies

Chapter 9: The Analysis of Competitive Markets Evaluating the Gains and Losses from Government Policies  When a price ceiling causes a shortage, the people who can afford the good are better off b/c they end up paying less for the good  Consumer Surplus: the aggregate net benefit that consumers gain from a competitive market o In market, market price is determined by supply & demand but some consumers value products above their market price and would be willing to pay more than market price  Producer Surplus: the aggregate net benefit that producers gain from a competitive market o In market, some producers produce their product at a cost lower than the market price and can still sell their product at a price lower than the market price Application of a Consumer and Producer Surplus  Welfare effects: gains and losses to consumers and producers when govt intervenes  Change in Consumer Surplus: o Some are worse off and some are better off after change in consumer surplus o The ones who were worse off were rationed out b/c fewer goods were produced  Change in Producer Surplus: o w/ price control, some producers with relatively lower costs will stay in market but will receive a lower price for their output  Deadweight Loss: Net loss of total consumer surplus and producer surplus The Efficiency of a Competitive Market  Economic Efficiency: Maximization of aggregate consumer surplus and producer surplus o Deadweight loss decrease producer surplus and consumer surplus and created an efficiency cost  Competitive markets are not always best left alone (esp. during market failures) o Market failure: Situation in which an unregulated competitive market is inefficient b/c prices fail to provide proper signals to consumers and producers  Externalities  Lack of info Minimum Prices  There are govt policies to raise the min price  When min price is raised consumers are worse off  For producer
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