课件1.pptVIP

1. The Market Economy Fall 2008 Outline A. Introduction: What is Efficiency? B. Supply and Demand (1 Market) C. Efficiency of Consumption (Many Markets) D. Production Efficiency (Many Markets) A. Introduction Economics is based on assumptions of maximization and equilibrium: Individuals taking decisions to maximize profit or utility. (individualistic) These decisions interact in markets and we use the notion of equilibrium to predict what is the outcome. We build models who gets what and why they get it. (How resources are allocated.) These have testable implications. Key themes Incentives: Why do optimizers do what they do? Information: What do individuals know and is this useful? Surprising idea: Individual optimization can promote the common good. (In certain cases.) Markets and other domains where individuals interact aggregate individual’s decisions and information. Pareto Efficiency Definition: An allocation of resources is Pareto Efficient if it is not possible to reallocate resources to make everyone better off. How do we measure better off? We use Utility to measure welfare/happiness. Utility Possibilities: What is Feasible Utility Possibilities: What is Feasible Pareto efficiency: There is no waste Equity: equal shares Utilitarianism: Maximize U(1)+U(2) Rawls: Maximize min{U(1),U(2)} Example: Efficiency in Exchange A buyer values the good at 4 (and gets 0 otherwise). A seller who values the good at 2 (and gets 0 otherwise). They can trade at the price p. Buyer Seller Seller keeps the good no trade 0 2 Buyer pays seller p and 4-p p buyer gets the good Q: What values of p is trade better than no trade? B. The Supply and Demand Fable Suppose you have: 100 people each wanting a cup of coffee, but valuing the coffee different amounts. 80 people willing to make a cup, but with different costs. Your job is to decide who should get a cup and who should make it. What do you want to avoid: (1) A $5 buyer not getting