Upload
norman-hart
View
219
Download
2
Embed Size (px)
Citation preview
Review of Results from Double Auctions
• 20 different markets
• 10 buyers and 10 sellers in each market– the 5 buyers and 5 sellers on page 178-179
plus their clones– Prediction: P = $13 and Q = 26– results were very close to prediction
• For $6 increase in MC, the equilibrium price P = $16 and equilibrium Q = 20
Properties of Competitive Markets
• One price in the market which is the equilibrium price P
• Each firm produces a quantity such that MC equals the equilibrium price P– Hugo, Mimi,...
• Each consumer buys a quantity such that MB equals the equilibrium price P– Maria, Ken,...
Are Competitive Markets Efficient
• Definition (need to be careful)
• Pareto efficiency:– a situation where it is impossible to make one
person better off without hurting another person
Conditions for Pareto Efficiency
• marginal benefit equals marginal cost (for last item produced)
• marginal cost of each good should be the same for all producers
• marginal benefit of each good should be the same for all consumers
Are the conditions satisfied for a competitive market? Check ‘em
– first: MC = MB because equilibrium occurs at the intersection of the demand (MB) curve and the supply (MC) curve
– second: MB = P for each consumer, because each consumer sets MB = P and because there is a single equilibrium price P in the market equilibrium
– third: MC = P for each firm, because each firm sets MC = P and because there is a single equilibrium price P in market equilibrium
Answer: YES! ALL THREE CONDITIONS ARE
SATISFIED
07_06
QUANTITY
PRICE
Market supply(derived from firms'marginal costs)
Market demand(derived fromconsumers'marginal benefits)
FED
EfficientToo little Too much
We can measure how well the market works:
• Use producer and consumer surplus
• in an equilibrium of a competitive market the sum of producer surplus and consumer surplus is as large as possible
• OR, the marginal benefit less the marginal cost of all items produced is as large as possible
• Or, Deadweight Loss is eliminated
07_07
Too little
Efficient
QUANTITY
PRICE
Too much
Demand
Supply
C
D
Negative producer surplus and negative consumer surplus: area C + D
QUANTITY
PRICE
Demand
Supply
A
B
QUANTITY
PRICE
Demand
Supply
Deadweight loss: area A + B
Market price
Market price
Market price
Deadweight Loss from a Tax
• A tax on firms raises the marginal cost for each firm
• Supply curve shifts up by the amount of the tax
• Quantity produced falls
• Price rises, but by less than the tax
• Deadweight loss is created
07_08A
New supply curve
Old supply curve
Demand curve
QUANTITY
PRICE
Quantity declines by this amount.
New quantity Old quantity
New price
Old price
Price rises by this amount.
Price received by sellers after sending tax to government
Deadweight loss
Amount of sales tax
Deadweight Loss from a Sales Tax