Measuring the Gains from TradeAre Markets “Efficient”?Measuring Gains from TradeCalculating a Firm’s Gains.PowerPoint PresentationSlide 6Slide 7Calculating a Firm’s GainsSlide 9Slide 10Exercise on Calculating a Firm’s GainSlide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Calculating Total Gains.Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Economic Efficiency.Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 54Slide 55Slide 56Slide 57Slide 58Economic Efficiency & Competitive Markets.Slide 60Economic Efficiency, Competitive Markets & Floor Prices.Slide 62Slide 63Slide 64Slide 65Slide 66Slide 67Slide 68Slide 69Slide 70Slide 71Slide 72Slide 73Slide 74Slide 75Slide 76Slide 77Slide 78Economic Efficiency, Competitive Markets & Ceiling Prices.Slide 80Slide 81Slide 82Slide 83Slide 84Slide 85Slide 86Slide 87Slide 88Slide 89Slide 90Slide 91Slide 92Slide 93Slide 94Economic Efficiency, Competitive Markets; Floor & Ceiling Prices.Slide 96Slide 97Exercises on Calculating Deadweight Loss. Problem 1.Slide 99Slide 100Slide 101Slide 102Slide 103Slide 104Slide 105Slide 106Slide 107Slide 108Slide 109Slide 110Slide 111Slide 112Slide 113Slide 114Slide 115Slide 116Slide 117Slide 118Slide 119Slide 120Slide 121Slide 122Slide 123Slide 124Slide 125Slide 126Exercises on Calculating Deadweight Loss. Problem 2.Slide 128Slide 129Slide 130Slide 131Slide 132Slide 133Slide 134Slide 135Slide 136Slide 137Slide 138Slide 139Slide 140Slide 141Slide 142Slide 143Slide 144Deadweight LossSlide 146Slide 147Slide 148Slide 149Slide 150Slide 151Slide 152Slide 153Slide 154Slide 155Slide 156Slide 157Slide 158Deadweight Loss; An Example.Slide 160Slide 161Slide 162Slide 163Slide 164Slide 165Slide 166Slide 167Slide 168Slide 169Slide 170Slide 171Slide 172Slide 173Slide 174Slide 175Slide 176Slide 177Slide 178Slide 179Slide 180Slide 181Slide 182Slide 183Slide 184Exercise on Computing Welfare Effects of an Excise TaxSlide 186Slide 187Slide 188Slide 189Slide 190Slide 191Slide 192Slide 193Slide 194Slide 195Slide 196Slide 197Slide 198Slide 199Slide 200Slide 201Slide 202Slide 203Measuring the Gains from TradeGains from Trade and the Effects of Market RegulationAre Markets “Efficient”?•Economists often claim competitive markets are “efficient” at generating gains to buyers and sellers and that this is a primary reason why most market-driven economies have prospered while almost all command economies have collapsed.•Why? What does it mean?Measuring Gains from Trade•Buyers and sellers gain from free trades.•By how much do they gain?•Is this gain as large as possible?•How is the total gain distributed?•Can regulation of markets improve total gain, or alter its distribution between buyers and sellers?Calculating a Firm’s Gains.•Summing up the per unit Producer’s Surpluses amounts to calculating the area between the ??0011223344556677889910101010202030304040505000$/output unitOutput LevelMarginal Costp = Marginal RevenuePer output unitProducer SurplusesFigure 1Calculating a Firm’s Gains.•Summing up the per unit Producer’s Surpluses amounts to calculating the area between the marginal revenue curve and the marginal cost curve.Calculating a Firm’s Gains.•Summing up the per unit Producer’s Surpluses amounts to calculating the area between the marginal revenue curve and the marginal cost curve.•What if the firm makes a commodity available in any quantity, not just integer quantities?Calculating a Firm’s GainsMC(q)q*qTPS is sum of MR - MCMR = p(Infinitely Divisible Commodity)Calculating a Firm’s GainsMC(q)q*qTPS is sum of MR - MCMR = p(Infinitely Divisible Commodity)Calculating a Firm’s Gainsq*qMR = pTPS(q*)MC(q)TPS is sum of MR – MC= Area between MC & MR curves.(Infinitely Divisible Commodity)Exercise on Calculating a Firm’s Gain•A firm’s marginal cost curve has the equation MC(q) = 5 + q/2 $/output unit.•Graph the marginal cost curve.0010102020303040405050101020203030404000$/output unitOutput LevelFigure 3MC(q) = 5 + q/2 $/unit.FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3MC(q) = 5 + q/2 $/unit.MC(0) = $5 per unit.FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3MC(q) = 5 + q/2 $/unit.MC(0) = $5 per unit.MC(50) = $30 per unit.FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3If p = $25 per unit then what quantityshould the firm supply to max. its profit?Ans:FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3If p = $25 per unit then what quantity should the firm supply to max. its profit?Ans: Solve p = 5 + q*/2FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3If p = $25 per unit then what quantity should the firm supply to max. its profit?Ans: Solve p = 5 + q*/2; q* = 40.FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3Total Producer’s Surplus=FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3Total Producer’s Surplus= 05  (25 - 5)  40 = $400.FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3Total Producer’s Surplus= 05  (25 - 5)  40 = $400.Profit = ??FC = $600010102020303040405050101020203030404000$/output unitOutput LevelFigure 3Total Producer’s Surplus= 05  (25 - 5)  40 = $400.Profit = TPS – FC = $400 - $60 = $340.FC = $60Calculating Total Gains.•The sum of the gains over all suppliers is total PRODUCERS’ SURPLUS.•The sum of the gains over all consumers is total CONSUMERS’ SURPLUS.•TOTAL SURPLUS = PRODUCERS’ SURPLUS + CONSUMERS’ SURPLUSCalculating Total Gains.•The sum of the gains over all suppliers is total PRODUCERS’ SURPLUS.•Suppose there are just two firms supplying the market.Figure 5Figure 520203030qq11qq225050QQSS = = qq11 + + qq22pp ($/unit) ($/unit)pp ($/unit) ($/unit)pp ($/unit) ($/unit)151555151555151555Firm 1’s Supply CurveFirm 1’s Supply CurveFirm 2’s Supply CurveFirm 2’s Supply CurveThe Market Supply CurveThe Market Supply CurveFigure 520203030qq11qq225050QS = q1 + q2pp ($/unit) ($/unit)pp ($/unit) ($/unit)pp ($/unit) ($/unit)151555151555151555Firm 1’s Supply CurveFirm 2’s Supply CurveThe Market Supply CurveTotal PS = 05  10  50 = $250.$100