ECO2030 1st Edition Lecture 18 Outline of Last Lecture I Welfare Economics Outline of Current Lecture II Producer Surplus III Total surplus IV Price equilibrium and total surplus Current Lecture CS a measure of consumer well being PS a measure of producer well being a PS P Cost b at each Q the height of the S curve is the Market with many sellers Suppose P 40 and Q 15 then the marginal sellers cost is 30 however since the price 40 the sellers CS 10 per shoe Total PS the whole are PS 25x25 312 5 A lower price reduces PS Example if P falls to 30 PS 15x15 112 50 this is almost 3 times less than the original PS These 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 CS PS and total Surplus CS the value to buyers the amount paid by buyers PS amount received by sellers cost of production to sellers Total surplus CS PS total gains from trade in a market Efficiency an allocation of resources is efficient if it maximizes total surplus Efficiency Means the goods are consumed by those who value them the most the goods are produced by the producers with the lowest cost raising or lowering the quantity of a good would not increase total surplus Equilibrium quantity and price maximizes total surplus moving away from equilibrium will always reduce total surplus e g at Q 20 the cost of producing the marginal unit 35 but the value to consumers at that quantity is only 20 This means that the area between the green and red line is no longer part of total surplus The same problem occurs if Q 10 This Says that a market economy is better than a centrally planned market Free market vs Government intervention the market equilibrium is efficient No other outcome achieves higher total surplus Government cannot raise total surplus by changing the markets allocation of resources For central planners to allocate resources efficiently they would have to know every sellers cost and every buyers WTP for each good which is impossible chapter 8 The cost of taxation A tax on a good levied by buyers The demand curve shifts left by the amount of the tax A tax on a good levied by suppliers The supply curve shifts left by the amount of the tax A tax burden is always shared and will always decrease quantity sold Who pays more of the tax is determined by the elasticity of supply and demand
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