Today
Download
1 / 19

Today - PowerPoint PPT Presentation


  • 125 Views
  • Uploaded on

Today. Economic Efficiency Producer’s surplus Perfect competition and economic efficiency Return exams at end of class. Economic Efficiency. Reading: end of Chapter 21. Definition.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' Today' - mikel


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Today
Today

  • Economic Efficiency

    • Producer’s surplus

    • Perfect competition and economic efficiency

  • Return exams at end of class


Economic efficiency

Economic Efficiency

Reading: end of Chapter 21


Definition
Definition

  • Economic Efficiency: When goods are produced in the least costly manner and distributed to those who value them most.

  • Requires:

    • Productive Efficiency

    • Allocative Efficiency


Productive efficiency
Productive Efficiency

  • There is no way to re-direct production among firms to increase total output.


Perfect comp and productive efficiency
Perfect Comp and Productive Efficiency

  • In LR firms produce at lowest possible LRAC.

    • There is no way to cut costs by changing plant size.

  • Since all firms take the same price, all firms have same MC (why?)

    • There is no way to re-direct production to other firms and get lower marginal costs.

  • Productive efficiency holds.


Allocative efficiency
Allocative Efficiency

  • Goods are consumed by those who most value them.

  • There is no alternative comb. of goods that could be produced that would increase society’s well-being.


Measuring allocative efficiency
Measuring Allocative Efficiency

  • The sum of consumers’ surplus and producers’ surplus.


Recall consumers surplus
Recall: Consumers’ Surplus

  • The difference between what a consumer is willing to pay & what he does pay.

$/unit

8

A

6

B

4

D

2

units

1

3

4

5

2

6

7


Producers surplus sr perspective
Producers’ Surplus-SR perspective

  • The difference between the amount of revenue the firm earns and the minimum amount necessary to get the firm to produce that quantity of the good in the short run.

  • PS = Revenue - total variable costs.


Producers surplus market
Producers’ Surplus-Market

  • Selling 4 units @$6/unit.

  • Total revenue = B + C.

  • TVC for all firms is represented by the area under the SRS curve (why?) = C

  • B = producers’ surplus

$/unit

SRS

8

6

B

4

C

D

2

units

1

3

4

5

2

6

7


Allocative efficiency1
Allocative Efficiency

  • A + B = The sum of consumers’ and producers’ surplus.

  • Vertical distance between D and S is the difference between value to consumer and MC to producer.

  • What Q maximizes CS+PS?

$/unit

SRS

8

A

6

B

4

C

D

2

units

1

3

4

5

2

6

7


Allocative efficiency perfect competition
Allocative Efficiency & Perfect Competition

  • Perfectly competitive markets provide the allocatively efficient quantity of a good.


Perfect comp and econ efficiency
Perfect Comp and Econ Efficiency

  • Conclusion: Perfectly competitive markets are economically efficient!

  • This is one reason why we use them as a benchmark for our study of other market structures.


Excise taxes and allocative efficiency
Excise Taxes and Allocative Efficiency

  • Assume the market for wheat is perfectly competitive.

  • Shade in the sum of consumers’ and producers’ surpluses for the competitive market equilibrium.


Wheat
Wheat

Price/Gal.

  • Identify the market equilibrium price and quantity.

  • Shade in the CS + PS.

S

1.25

1.00

0.75

D

4

5

6

Bushels of wheat


Excise tax
Excise Tax

  • Add an excise tax of $0.50 per bushel to this market.

  • What happens to market price and quantity?

  • Shade in CS + PS in light of the tax.

  • Compare your answer to before the tax. Is it allocatively efficient to tax this industry?


Excise tax on wheat 50
Excise tax on wheat-50¢

S’

Price/Gal.

  • Price paid by elevator is $1.25

  • Price kept by farmer is $0.75.

  • What is quantity?

  • How is CS + PS affected?

0.50

S

1.25

1.00

0.75

D

4

5

6

Bushels of wheat


Conclusions on taxes efficiency
Conclusions on Taxes & Efficiency

  • An excise tax cuts the quantity exchanged below the optimal level.

  • This reduces the surplus that consumers and producers receive.

  • Conclusion: Excise taxes reduce market efficiency.


Next time
Next Time

  • Note: We are now one class period behind the syllabus.

  • April 2-4: Monopoly, Ch. 22

  • April 9-11: Oligopoly and Monopolistic Competition, Ch. 23


ad