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Chapter 9

MGEB02H3 Chapter Notes - Chapter 9: Deadweight Loss, Economic Surplus, Price Ceiling


Department
Economics for Management Studies
Course Code
MGEB02H3
Professor
A.Mazaheri
Chapter
9

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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 producers, they sell but a drop in quantity results in a loss of surplus
If producers expand production, they won’t earn revenue for producing
o Loss of surplus to producers
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