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U of M ECON 1101 - Surplus and Paredo Efficiency

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Econ 1101 1st Edition Lecture 9Outline of Last Lecture I. Income Elasticity of DemandII. Normal GoodsIII. EconLandIV. Marginal CostMarginal Reservation PriceOutline of Current Lecture\V. SurplusVI. Pareto EfficiencyVII. Link between Pareto efficiency and market allocationCurrent LectureHow do we measure how happy consumers are? Consumer surplus! (reservation price – price paid)How do we measure producer surplus?Same idea as profit! (Price received – cost)There is NO such thing as negative consumer surplus because if it is too spendy than consumers will not buy it. If they DO buy it and it was over reservation cost, then yes, there is, but in perfect world there is not.example: if you priced a tshirt at $10 and they sold it for $20 you would not buy it, therefore there is no consumer surplus nor is it negative.Total surplus: consumer surplus + producer surplusconsumer surplus: area between demand curve and price lineproducer surplus: area between supply curve and price lineMarket allocation: division of a market into portionsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Pareto EfficiencyCreated by VilfredoParedo (1848-1923).An allocation is Pareto Efficient if it is feasible (possible) and there is no way to make someone better off without making someone worse off. On the FLIPSIDEPie is only as big as it can be  someone gets a bigger slice, than someone else has to get a smaller slice (not paredo efficient)EFFICIENCY DOES NOT EQUAL EQUALITYIt is not efficient to have higher cost seller to make widgethe can make a deal with seller of lower costs.3 General Principles of Efficiency:1. Efficient Allocation of Consumptiona. Consumers with highest willingness to pay buy first2. Efficient Allocation of Productiona. Producers with lowest cost sell first3. Efficient Quantitya. n any efficient allocation, the value (reservation price) of the lastunit consumed should be equal to the cost of the last


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