tailieunhanh - Lecture Principles of microeconomics - Chapter 7: Efficiency and exchange

This chapter introduces you to the concepts of Pareto efficiency and economic surplus. It also examines ways in which efficiency is reduced by the imposition of price controls and taxes. | Efficiency and Exchange Slide 7 - What is Chapter 7 about? Slide 7 - I. Market Equilibrium and Efficiency Slide 7 - We assume technical, productive efficiency Pareto efficiency – in allocation No individual can be made better off without one or more other individuals being made worse off Note: “Better off” by own preferences Reallocating resources must harm one or more individuals in order to help another Equilibrium property of perfectly competitive markets Market Equilibrium and Efficiency Slide 7 - Key Idea - Mutual Benefits of Voluntary Exchange If Price = Revenue from transaction to seller = Cost of transaction to buyer And if both voluntarily agree to transaction Both must benefit from exchange Well being increases – and continues to increase as long as both have an incentive to trade When no further desire to trade – well being at maximum Powerful idea – but limited in application to perfectly competitive markets Slide 7 - Every buyer and seller is a . | Efficiency and Exchange Slide 7 - What is Chapter 7 about? Slide 7 - I. Market Equilibrium and Efficiency Slide 7 - We assume technical, productive efficiency Pareto efficiency – in allocation No individual can be made better off without one or more other individuals being made worse off Note: “Better off” by own preferences Reallocating resources must harm one or more individuals in order to help another Equilibrium property of perfectly competitive markets Market Equilibrium and Efficiency Slide 7 - Key Idea - Mutual Benefits of Voluntary Exchange If Price = Revenue from transaction to seller = Cost of transaction to buyer And if both voluntarily agree to transaction Both must benefit from exchange Well being increases – and continues to increase as long as both have an incentive to trade When no further desire to trade – well being at maximum Powerful idea – but limited in application to perfectly competitive markets Slide 7 - Every buyer and seller is a price-taker: No buyer or seller can control the price Implication: No market participant is “large” in relation to the total size of the market. Equal information about product quality Full information about what is happening in the market Perfect competition implies NO economic power. Chapter 9 will study market forms where abuse occurs, and Pareto efficiency is prevented from realization Perfect Competition Slide 7 - Some markets are ‘close enough’ to perfect competition Easier to understand other market forms if one understands perfect competition Perfect competition provides a benchmark for comparisons Why Study Perfect Competition if it is Rare in Reality? Slide 7 - II. Economic Surplus Slide 7 - Total economic surplus The sum of all the individual economic surpluses gained by buyers and sellers participating in the market Consumer Surplus What consumers would have been willing to pay minus what they actually did pay Producer Surplus What producers do get for output minus .

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