Exam 3 Notes (week 1)
Exam 3 Notes (week 1) ECON 2010
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This 12 page Class Notes was uploaded by Alexandra on Tuesday October 27, 2015. The Class Notes belongs to ECON 2010 at Clemson University taught by Frederick A. Hanssen in Summer 2015. Since its upload, it has received 50 views. For similar materials see Principles of Economics: Microeconomics in Business at Clemson University.
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Date Created: 10/27/15
Measuring the gains from markets Monday October 26 2015 1115 AM Amazon Question Amazon DOES produce something They are producing trades And the corresponding gains from trade By making it easier for buyers and sellers to find each other they increase gains from trade Trade creates wealth by moving goods and services from uses Anything that facilitates trade makes us better off collectively Where We Are Remember we described economics as quotthe study of the allocation of resources 0 What to make how to make it and who gets to consume it Markets allocate resources through the processes of demand and supply 0 I Inspires substitution away demand I Draws in more resources supply O Our objective now is to evaluate that process Are goods ending up in the hands of those who value them most Are the goods being supplied by sellers who can do it at lowest cost Are the gains from trade maximized We will begin by developing a measure to quantify gains from trade We will then apply that measure to analyze market outcomes DemandSupply Gains from Trade Let s start with a single transaction assumed to be one of ma nv in the market vm vo m m v m vv v v V v v v for widgets Quentin would get 25 in benefits from a widget but does not have one Sylvia has a widget and opportunity cost of letting it go is 10 0 There are potential gains from trade 251015 0 Trades can occur whenever the MB to buyers gt MC to sellers 0 The area below the demand curve and above the supply curve represent potential gains from trade Gains from Trade in Generic Market Assume trade occurs at the equilibrium price How large are the gains to society Pe Total Surplus D 0 The area under the demand curve indicates the total benefits enjoyed by consumers 0 The are under the supply curve indicates the total costs to producers of supplying the good 0 Trade occurs where the benefit to consumers is greater than the cost to producers This the area below the demand curve and above the supply curve 0 That area represents the total gains from trade generated in that market 0 The gains from trade are also known as the It is difference between the benefit and the costs generated by that market Who gets this Surplus Some ofthe surplus is enjoyed by consumers and some ofthe surplus is enjoyed by producers l Price Pe Consumer Surplu Producer Surplus Qe 0 The market price is what the consumer must give up to obtain a unit of the product ie is the consumer s opportunity cost Thus the area between the demand curve and the market price indicates how much better off consumers are because they can transact in this market This is the 0 The market price is also the benefit that suppliers receive for relinquishing their product Thus the area between the market price and the supply curve indicates how much better off are producers because they can transact in this market difference between the sellers OC and their MB Surplus Measure of Gains from trade from Operation of Market Surplus measures the marginal benefits less the marginal costs It is our measure of the gains from trade of how much better off are participants in a market Surplus provides the basis for analyzing the efficiency of an arrangement 0 We say an action is efficient if it increases surplus 0 We say an action is inefficient if it decreases surplus Note that this is very different from an engineering definition of efficiency 0 Engineering maximum work done for minimum resources used Burning coal always more efficient than burning wood running train 0 Economics largest surplus Either burning wood or burning coal may be more efficient given costs and benefit The most efficient Paretooptimal action is that which produces largest surplus Using the surplus standard In each case let us ask quotAre the marginal benefits greater than the marginal costs 0 Was it efficient surplusincreasing for Apple to develop and marketa larger iPhone 0 Was it efficient surplusincreasing for you to come to class today gt These questions we don t have to spend a lot of time thinking about because ifthe benefits did not exceed costs Is it efficient surplusincreasing to increase drug safety standards 0 Would it be efficient surplusincreasing to establish a big carbon tax to redult global warming gt These are harder questions because they involve 0 Was it efficient surplusincreasing for Mother Theresa to build hospitals for lepers in Calcutta rather than say building up a business that would have made her rich 6 Yes Remember L T quotgenerates more moneyquot Equilibrium Price At the equilibrium price and quantity 1 Those who value the good most highly consume it those who value it less do not 2 Those who can supply the good at lowest cost produce it those who cannot do not 3 Total surplus is DON39TPRODU S CONSUME GOOD DON TCONSUME DUCEGOOD D In the absence of neglected costs or bene ts the equilibrium quantity and price are ef cient In other words markets allocate resources efficiently Price is the value of the marginal unit the last unit consumed It thus tells us how valuable consuming one more unit of the good would be Note that the price is also the cost of the marginal unit the last unit produced It thus tells us how costly supplying one more unit of the good would be NFL vs Teacher Question Do these salary differences imply that society values Understanding Prices NFL players more than teachers The average public school teacher in the US makes S57000 per year The average NFL player makes S700000 per year People use such differences to critique market economies or modern society in genera quotSomething is wrong with markets ifthey produce an outcome that values football players more than teachers Supply of teachers is VERY elastic Supply curve for NFL players is much LESS elastic Prices salaries are defined by the intersection of supply and demand There is a much larger area under teacher demand curve Surplus teachersgt Surplus NFL Price and total value to society are two DIFFERENT things n 2II 21 AI I LIA AAI 39 FrlCe IS tne value OT tne marginal UHII
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