microeconomics ch 7 market efficiency
microeconomics ch 7 market efficiency ECON 211
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This 2 page Class Notes was uploaded by Addie Pearson on Friday April 8, 2016. The Class Notes belongs to ECON 211 at Clemson University taught by prof fiore in Winter 2016. Since its upload, it has received 8 views. For similar materials see Micro Economics in Economcs at Clemson University.
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Date Created: 04/08/16
MARKET EFFICIENCY ch 3,4 7(skim) (“market efficiency” posted under extra readings tab on Bb) Prelim: measuring efficiency - Recall that we evaluate actions “at the margin” o The issue is not whether an action is “good” ro “bad” but whether a little more action will generate more benefits than costs - Consider a patent, an exclusive right to sell a product for 20 yrs o The benefit of a patnt is that it provides firms and induviduals with the incentive to develop new and better products o The cost of a patent is that it reduces competition, and thus allows patent holders to charge higher prices - Would it be efficient to have longer patent protection? o If extending the duration of patents would generate additional benefits of $35 billion and additional costs of $20 billion, we would judge the action to be EFFICIENT (MB>MC) - An action is efficient only if the marginal benefits are greateer than the marginal costs - The MOST EFFICIENT action is one that produces the biggest net gain (i.e. biggest postivie difference between MB and MC) The social welfare consequences of markets - What purpose do markets serve? o Markets are a medium which allows buyers and sellers to efficiently allocate resources - Trade in markets (and specialization) are big reasons why people are so much better off today than 200, 100, 50 years ago o Greater caloric intake o Longer life expectancy o Lower rates of infant mortality How can we measure the benefit of a given market? - The gains from trade are measured of how much better off the operation of a market makes us - Simple ex: o John would get $25 in benefits from a widget, but doesn’t have one o Sarah has a widget, and an opportunity cost of letting it go of $10 o If the widget moves from Sarah to John, the values rises from 10 to 25 - If the trade occurs, society is $15 better off Gains form trade and markets? - Assume trade occurs at the equilibrium price. How large are the gains to society? o The demand curve indicates the benefits enjoyed by consumers o Supply curve indicates the costs to producers of supplying the good o Trade occurs where the benefit to consumers is greater than the cost to producers o The area (triangle) represents the total gains from trade generated in that market o The gains from trade are also known as the “TOTAL SURPLUS” Who gets the surplus? - Some of the surplus is enjoyed by consumers and some is enjoyed by producers o The market price is the consumers opportunity cost (what they must give up to obtain a unit of the product) Thus: the area between demand curve and the market price indicates how much better of consumers are bc they can trade in this market This is the CONSUMER SURPLUS (CS) o The market price is also the benefit that suppliers receive for selling their product This the area between the market price and the supply curve indicates ow much better off producer are bc they can trade in this market This is called PRODUCER SURPLUS (CS) o The sum of the two is the TOTAL SURPLUS generated in that market
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