Economic EfficiencyPrinciples of Microeconomics 2023

Boris Nikolaev

The Water-Diamond Paradox

Another look at the demand curve…

P

Q

D = MB

We can think of the demand curve asThe marginal (additional) benefit fromconsuming one more unit of good.

Consumer Surplus

P

Q

D = MB

Difference between what consumersare willing to pay and what they actually pay.

"The price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction. The excess of price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction. It may be called consumer’s surplus.“

A. Marshall

Producers Surplus

P

Q

S=MC

Difference between what producersare willing to sell their product at and what they actually receive for it.

Efficiency gains from trade

• In Just Go With It [watch here]

Efficiency (in a free market)

P*

Q*

S

D

Welfare (deadweight) loss (underproduction)

P*

Q*

S=MC

D=MB

Welfare (deadweight) loss (overproduction)

P*

Q*

S

D

Do you support welfare programs?

The American Class System

“Who controls the past, controls the future. And those who control the present control the past.”

George Orwell

Government Price-Fixing

• Price floors (e.g. the minimum wage law)• Price ceilings (e.g. rent control)• Price support (dairy subsidies)

Price Floor (e.g. minimum wage)

P*

Q*

P

S labor

D labor

min. wage

Price Floor (e.g. minimum wage)

P*

Q*

P

S labor

D labor

min. wage

Economic Effects of a min. wage

Price Ceiling (e.g. rent control)

P*

Q*

P

S

D

rent ceiling

Price Ceiling (e.g. rent control)

P*

Q*

P

S

D

rent ceiling

Economic effects of rent control

Price Support (dairy price support)

P*

Q*

S

D

P support price

Price Support (dairy price support)

P*

Q*

S

D

P

support price

Economic Effects of price support

Should we legalize the market …

… for human organs?

Currently…

P*

Qs*

S

D

P

Notice that the supply curveis vertical. We will call suchcurve perfectly inelastic.

Qd0

cost is $0 (donations) shortage of organs (89K waiting list + 400 die every year)

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What if we had a free market?

P*

Q*

S

D

What about prostitution?