ECO2030 1st Edition Lecture 18Outline of Last Lecture I. Welfare EconomicsOutline of Current Lecture II. Producer SurplusIII. Total surplusIV. Price equilibrium and total surplusCurrent Lecture● CS - a measure of consumer well-being● PS - a measure of producer well-beinga. PS = P - Cost b. at each Q the height of theS curve is the Market with many sellers Suppose P = 40 and Q = 15, then themarginal sellers cost is $30, however,since the price = $40, the sellers CS = $10per shoeTotal PS = the whole are PS = ½(25x25) = $312.5A lower price reduces PS:Example if P falls to $30 PS = ½(15x15) = $112.50this is almost 3 times less than the original PSThese 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 maximizestotal surplus, moving away from equilibriumwill always reduce total surpluse.g. at Q = 20 the cost of producing themarginal unit = $35, but the value toconsumers at that quantity is only $20This means that the area between thegreen and red line is no longer part of totalsurplus!The same problem occurs if Q = 10.This Says that a market economy is betterthan 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
View Full Document
Unlocking...