Week 12 chapter notes

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University of Toronto Scarborough
Economics for Management Studies

Chapter 9 The Analysis of Competitive Markets Notes 9.1 Evaluating Gains and Losses from Government PoliciesConsumer & Producer Surplus N a government-imposed price ceiling causes the quantity of a good demanded to rise (at the lower price, consumers want to buy more) and the quantity supplied to fall (producers are not willing to supply as much at the lower price) N the result is a shortage; of course, those consumers who can still buy the good will be better off because they will now pay less Review of Consumer and Producer Surplus N consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good N because consumer surplus measures the total net benefit to consumers, the gain or loss to consumers can be measured from a government intervention by measuring the resulting change in consumer surplus N for each unit, producer surplus is the difference between the market price the producer receives and the MC of producing it N for the market as a whole, the producer surplus is the area above the supply curve up to the market price N this is the benefit that lower-cost producers enjoy by selling at the market price N because producer surplus measures the total net benefit to producers, the gain or loss to producers can be measured from a government intervention by measuring the resulting change in producer surplus Application of Consumer and Producer Surplus N welfare effects gains and losses to consumers and producers N deadweight loss net loss of total (consumer plus producer) surplus 9.2 The Efficiency of a Competitive Market N economic efficiency maximization of aggregate consumer and producer surplus N policy imposes an efficiency cost: taken together, producer and consumer surplus are reduced by amount of deadweight loss N market failure situation in which an unregulated competitive market is inefficient because prices fail to provide proper signals to consumers and producers (i.e., does not maximize aggregate consumer and producer surplus) N there are 2 important instances in which market failure can occur: 1. externality action taken by either a producer or a consumer which affects other producers or consumers but is not accounted for by the market price (they are called externalities because they are external to the market) 2. lack of information: market failure can also occur when consumers lack information about the quality or nature of a product and so cannot make utility-maximizing purchasing decisions; government intervention may then be desirable N in absence of externalities or lack of info, an unregulated competitive market does lead to the economically efficient output level 9.3 Minimum Prices N gover
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