ECON 1116 19 SeptemberChange in market equilibrium- Increase in demand leads to:o Increase in Po Increase in Q- Decrease in demand- Increase in supply- Decrease in supply- 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 shiftsThe economic problem- How to produce?- For whom to produce?o If consumers are rivals Allocate output so that consumers’ marginal valuations are equated MSV equals common MV among consumers-What to produce?o Determining the efficient output levelMarginal analysisConsider marginal units and compare:-Benefits of having that unit-Costs of obtaining that unitIf the benefits are greater than the costs, the unit should be produced EX: single-person economy; Gaston produces cheese and wineo Efficiency: Gaston produces and consumes 4 pounds of cheese per week At 4 pounds of cheese per week, MV = MCSocial surplus- Difference between what society is prepared to forgo vs. what it must actually forgo- Marginal surplus:o MV – MOC- Efficient allocation of resources is the allocation that maximizes surpluso MV = MCo Measure inefficiency by the amount of surplus forgone- Deadweight loss (DWL)- Producers equate MC- Consumers equate MV- Sum of consumer and producer surplusWelfare Theorem- The market will yield efficient allocations of resources ifo All agents are price takersECON 1116 19 September Competitive marketo 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 consumptiono 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” claimPractice problems:1. False; the quantity demanded changes2. False; marginal value is still positive, but the marginal cost is greater than themarginal value (MC > MV)3. True; total revenue = P*Q*, and TR – sum of MC = producer surplus4.
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