ECON 1116 19 September Change in market equilibrium Increase in demand leads to o Increase in P o Increase in Q Decrease in demand Increase in supply Decrease in supply The economic problem How to produce For whom to produce o If consumers are rivals Simultaneous shifts of supply and demand lead to a variety of outcomes see table in pp and textbook o Dependent on the magnitude of the shifts Allocate output so that consumers marginal valuations are equated MSV equals common MV among consumers What to produce o Determining the efficient output level Marginal analysis Consider marginal units and compare Benefits of having that unit Costs of obtaining that unit If the benefits are greater than the costs the unit should be EX single person economy Gaston produces cheese and wine produced o Efficiency Gaston produces and consumes 4 pounds of cheese per week At 4 pounds of cheese per week MV MC Difference between what society is prepared to forgo vs what it must Social surplus actually forgo Marginal surplus o MV MOC Efficient allocation of resources is the allocation that maximizes surplus o MV MC o Measure inefficiency by the amount of surplus forgone Deadweight loss DWL Producers equate MC Consumers equate MV Sum of consumer and producer surplus Welfare Theorem The market will yield efficient allocations of resources if o All agents are price takers ECON 1116 19 September Competitive market o Property rights are well defined Markets are complete everything priced owned Producer can limit consumption to those paying for good excludability o Consumers are rivals in consumption o Perfect information across agents In contrast to used car market health care etc If one of these criteria is violated it s still possible to get an efficient allocation but it s not guaranteed as it is when all four are fulfilled Basically a modern interpretation of Smith s Invisible Hand claim Practice problems 1 False the quantity demanded changes 2 False marginal value is still positive but the marginal cost is greater than the marginal value MC MV 3 True total revenue P Q and TR sum of MC producer surplus 4 C
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