Market Equilibrium and Efficiency a(Poreto) Efficient A situation is efficient if no change is possible that will help some people without harming others What do you think? Are markets always efficient and equitable? Chapter 7: Efficiency and Exchange Slide 6
MB MC Chapter 7: Efficiency and Exchange Slide 6 Market Equilibrium and Efficiency ◼ (Poreto) Efficient A situation is efficient if no change is possible that will help some people without harming others. ◼ What do you think? ⚫ Are markets always efficient and equitable?
Market Equilibrium and Efficiency aAmarket equilibrium is efficient If price and quantity take any other than their equilibrium values, a transaction that will make at least some people better off without harming others can always be found Chapter 7: Efficiency and Exchange Slide 7
MB MC Chapter 7: Efficiency and Exchange Slide 7 Market Equilibrium and Efficiency ◼ A market equilibrium is efficient ⚫ If price and quantity take any other than their equilibrium values, a transaction that will make at least some people better off without harming others can always be found
A Market in Which Price Is Below the Equilibrium Leve 2.50 2.00 s 1.50 1.00 3 4 Quantity(1,000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 8
MB MC Chapter 7: Efficiency and Exchange Slide 8 A Market in Which Price Is Below the Equilibrium Level 2.50 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 2.00 1.50 1.00 .50 D S
How EXcess Demand creates an Opportunity for a Surplus-Enhancing Transaction 2.50 If P= $l then Qs = 2,000 2.00 gallons/day At 2,000 gallons the consumer is willing to pay $2 and the MC=$1 61.50 If the buyer pays $1. 25for an extra gallon, producer is $ 25 1.25 better off. and the consumer is 1.00 $.75 better off, or economic surplus increases by $1.00 At $1, the market is not efficient 3 4 Quantity(1,000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 9
MB MC Chapter 7: Efficiency and Exchange Slide 9 How Excess Demand Creates an Opportunity for a Surplus-Enhancing Transaction 2.50 Quantity (1,000s of gallons/day) Price ($/gallon) D S 1 2 3 4 5 2.00 1.50 1.00 .50 1.25 • If P = $1 then QS = 2,000 gallons/day • At 2,000 gallons the consumer is willing to pay $2 and the MC = $1 • If the buyer pays $1.25 for an extra gallon, producer is $.25 better off, and the consumer is $.75 better off, or economic surplus increases by $1.00 • At $1, the market is not efficient
How Excess Supply Creates an Opportunity for a Surplus-Enhancing Transaction 2.50 .If P= s2 then Qn =2,000 2.00 gallons/day 31.75 . Additionaloutput costs only $1 s This is $1 less than a buyer would 1.50 pay if the buyer pays the seller $1.75, the buyer gains an economic 1.00 surplus of $0. 25 then the seller gains an economic surplus of 075 5 Quantity(1,000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 10
MB MC Chapter 7: Efficiency and Exchange Slide 10 How Excess Supply Creates an Opportunity for a Surplus-Enhancing Transaction Quantity (1,000s of gallons/day) Price ($/gallon) D S 1 2 3 4 5 2.50 2.00 1.50 1.00 .50 1.75 •If P = $2 then QD = 2,000 gallons/day •Additional output costs only $1 •This is $1 less than a buyer would pay •If the buyer pays the seller $1.75, the buyer gains an economic surplus of $0.25 then the seller gains an economic surplus of $0.75