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Market Dynamics and Welfare Economics

The document discusses the principles of market and welfare economics, emphasizing how supply and demand determine prices and quantities of goods. It introduces concepts such as consumer surplus and producer surplus, highlighting their roles in evaluating market efficiency and economic well-being. The text also argues for the effectiveness of free markets in resource allocation and questions the need for a social planner in this context.

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nhiphamtrang102
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12 views14 pages

Market Dynamics and Welfare Economics

The document discusses the principles of market and welfare economics, emphasizing how supply and demand determine prices and quantities of goods. It introduces concepts such as consumer surplus and producer surplus, highlighting their roles in evaluating market efficiency and economic well-being. The text also argues for the effectiveness of free markets in resource allocation and questions the need for a social planner in this context.

Uploaded by

nhiphamtrang102
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

MARKET AND WELFARE

Recap
• The force of supply and demand determine the prices of goods
and services and the quantities sold.
• Markets are usually a good way to organize economic activity.
• Welfare economics: the study of how the allocation of resources
affects economic well-being.

compensating variation
Consumer Surplus
• Willingness to Pay: the maximum amount that a buyer will pay for
a good.
• Consumer surplus: the amount a buyer is willing to pay for a good
minus the amount the buyer actually pays for it.
• Our goal in developing the concept of consumer surplus is to
make judgments about the desirability of market outcomes.
• In some circumstances, policymakers might choose to disregard
consumer surplus because they do not respect the preferences
that drive buyer behavior (e.g., addicted drug).
Producer
Surplus
• Cost: The value of
everything a seller must
give up to produce a
good.
• Producer surplus: the
amount a seller is paid
for a good minus the
seller’s cost of providing
it.
A higher price raises producer surplus
Market Efficiency
• Efficiency: the property of a resource allocation of maximizing the
total surplus received by all members of society.
• Total surplus = (Value to buyers – Amount paid by buyers)
+
(Amount received by sellers – Cost to sellers)
= Value to buyers – Cost to sellers
* Equality: the property of distributing economic prosperity
uniformly among the members of society.
Evaluating the
Market Equilibrium
• Free markets allocate the supply of
goods to the buyers who value
them most highly, as measured by
their willingness to pay.
• Free markets allocate the demand
for goods to the sellers who can
produce them at the lowest cost.
• Free markets produce the quantity
of goods that maximizes the sum of
consumer and producer surplus.
IMPLICATIONS
• No need a benevolent social planner: because rarely find; lack
crucial information.
• Noone can replace the role of free market to allocate resources:
invisible hand.
• Invisible hand takes all the information about buyers and sellers
into account and guides everyone in the market to the best
outcome as judged by the standard of economic efficiency.

• SHOULD THERE BE A MARKET FOR ORGANS?


TAXES
Elasticity
and Tax
Incidence
The
Determinants
of the
Deadweight
Loss
Deadweight Loss and Size of a Tax

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