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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 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 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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NU ECON 1116 - Notes

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