ECON 251 1st Edition Lecture 7 Outline of Last Lecture I. ExamplesII. Ɛd and RevenueIII. Other ElasticitiesIV. Determinates of ƐsV. Extreme CasesOutline of Current Lecture I. TermsII. Allocative EfficiencyIII. ConsumerIV. SurplusV. Producer SurplusVI. Deadweight LossVII. EquityCurrent LectureI. TermsAllocative Efficiency: resources are used where they are most highly valuedConsumer Surplus: value the consumer receives above the price paid (CS)Producer Surplus: value the producer receives above the cost (PS)Deadweight Loss: a decrease in (CS + PS) as a result in an inefficient level of productionEquity: fairnessSymmetry Principle: people in similar situations should be treated similarlyMB: marginal benefitMC: marginal costQ: quantityP: priceQd: quantity demandedQs: quantity suppliedII. Allocative EfficiencyValue “here” vs. value elsewhereMB value of using resources in the best alternativeThese 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.looking at the opportunity costMC(the difference between the opportunity cost and the MC is that the OC is for any number of units and the MC is only one unit)If MB > MC you should increase Q to increase efficiency-----MB – the value of resources in current use-----MC – the value of resources in best alternativeIf MB < MC you should decrease Q to increase efficiency----you should move the resourcesIf MB = MC reached allocative efficiencyMB – comes from demandMC – comes from supplyMB = MC occurs at equilibrium At equilibrium there is allocative efficiencyD: Qd = -1/2P + 6 (P = -2Qd + 12)S: Qs = 2P – 4 (P = -1/2Qs + 2)At Q = 3:MB = $6 MC = $3.50At Q = 5:MB = $2 MC = $4.50III. Consumer SurplusExample:(½)bh = (1/2)(4)(8) = 16= ∑(MC – price)IV. Producer SurplusExample:(½)bh = (1/2)(4)(2)∑(price – MC)(PS + CS) is maximized at equilibrium (allocation efficiency)(PS + CS) is the “total surplus”V. Deadweight LossDeadweight loss = lost CS + lost PSDWL = 1/2bh = ½(1)(2.50) = 1.25VI. EquitySymmetry Principle- Same rules?- Same outcomes?Example: Court Case: Griggs v Duke Power (1971)All employees were required to have a high school diploma. So all of the employees who did nothave a diploma were fired. Most of the fired employees, including Griggs, were African American. The court decided that it was “unfair”.----Recognize that it can be very difficult to decide
View Full Document