Market Equilibrium and Efficiency Observations on efficiency When price is above or below the equilibrium, the quantity exchanged will be below the equilibrium o The vertical value on the demand curve (marginal benefit) is greater than the vertical value on the supply curve(MC) Chapter 7: Efficiency and Exchange Slide 11
MB MC Chapter 7: Efficiency and Exchange Slide 11 Market Equilibrium and Efficiency ◼ Observations on Efficiency ⚫ When price is above or below the equilibrium, the quantity exchanged will be below the equilibrium. ⚫ The vertical value on the demand curve (marginal benefit) is greater than the vertical value on the supply curve (MC)
Market Equilibrium and Efficiency Markets will be efficient when Buyers and sellers are well informed o Markets are perfectly competitive ● Supply measures al‖ relevant costs. o Demand measures all relevant benefits Chapter 7: Efficiency and Exchange Slide 12
MB MC Chapter 7: Efficiency and Exchange Slide 12 Market Equilibrium and Efficiency ◼ Markets will be efficient when ⚫ Buyers and sellers are well informed. ⚫ Markets are perfectly competitive. ⚫ Supply measures all relevant costs. ⚫ Demand measures all relevant benefits
Market Equilibrium and Efficiency What do you think? o Is efficiency the only goal? Why should efficiency be the first goal? Chapter 7: Efficiency and Exchange Slide 13
MB MC Chapter 7: Efficiency and Exchange Slide 13 Market Equilibrium and Efficiency What do you think? ⚫Is efficiency the only goal? ⚫Why should efficiency be the first goal?
The Cost of Preventing Price Adjustments a Price Ceilings Do They Help the Poor? o An EXample-----7. .A Price Ceiling for Home Heating Oi Chapter 7: Efficiency and Exchange Slide 14
MB MC Chapter 7: Efficiency and Exchange Slide 14 The Cost of Preventing Price Adjustments ◼ Price Ceilings ______Do They Help the Poor? ⚫ An Example-----7.1 ◆A Price Ceiling for Home Heating Oil
Economic Surplus in an Unregulated Market for Home Heating oil Consumer surplus 200=$900/day 1.80 1.60 140 Producer surplus 1.20 =$900/day a1.00 D Without price controls. .Equilibrium Price= $1.40 Consumersurplus= (1/2)(3,000)(60)=$900/day .Producer surplus (1/2)(3,000)(6)=900day .Economic surplus=$1, 800/day 12345 Quantity(1, 000s of gallons/day) Chapter 7: Efficiency and Exchange Slide 15
MB MC Chapter 7: Efficiency and Exchange Slide 15 Producer surplus = $900/day Consumer surplus = $900/day D S Economic Surplus in an Unregulated Market for Home Heating Oil 2.00 Quantity (1,000s of gallons/day) Price ($/gallon) 1 2 3 4 5 1.60 1.20 1.00 .80 1.80 1.40 8 Without price controls: •Equilibrium Price = $1.40 •Consumer surplus = (1/2)(3,000)(.60) = $900/day •Producer surplus = (1/2)(3,000)(.6) = 900/day •Economic surplus= $1,800/day