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Title: Microeconomics-efficiency and fairness of market
Description: market fair. Robert Nozick(1974) argued that fairness requires two rules. compromise. consumer surplus. demand curve. How a lower price raises consumer surplus. What does consumer surplus measure
Description: market fair. Robert Nozick(1974) argued that fairness requires two rules. compromise. consumer surplus. demand curve. How a lower price raises consumer surplus. What does consumer surplus measure
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LECTURE 7: EFFICIENCY AND FAIRNESS OF
MARKET
Learning outcomes
At the end of the session, students will be able
to
identify how the consumer surplus is derived
how the demand curve is used to measure with
the consumer surplus
Justify the fairness of the market
ARE THE MARKETS FAIR?
Economists have a clear definition of efficiency
but do not have a similarly clear definition of
fairness
...
They involve the study of ethics
...
It’s not fair is the result isn’t fair
...
Robert Nozick (1974) argued that fairness requires
two rules:
The state must establish and protect private
property
Goods and services and the services of factors
of production may be transferred from one
person to another only by voluntary exchange
with everyone free to engage in such
exchange
...
Most people think that the fair rules approach
leads to too much inequality –to an unfair
result
...
IT’S NOT FAIR IS THE RESULT ISN’T FAIR
The fair approach conflicts with allocative
efficiency and leads to what so called the big
tradeoff between efficiency and fairness that
recognizes the cost of making income transfer
...
It results in the quantity of labour being less than
the efficient quantity
...
The greater the scale of income redistribution
through income taxes, the greater is the
inefficiency – the smaller is the pie
...
It is even possible
that those with low incomes end up being worse
off
...
CONSUMER SURPLUS
Consumer surplus is the amount a buyer is willing
to pay for a good minus the amount the buyers
actually pays for it
...
AN EXAMPLE: WILLINGNESS TO PAY ALBUM
Four buyers A, B, C and D would like to own The
Elvis Presley’s First Album during an auction
...
AN EXAMPLE: WILLINGNESS TO PAY ALBUM
Mr
...
However, initially, his
willingness to pay was actually RM 200
...
A’s consumer surplus for getting the album was
RM RM 200 – RM 160 = RM 40
...
Assume that both albums are to be sold at the
same price, RM 140 and no buyer is interested
to buy more than on e album
...
Both A and B bought the albums for RM 140
each
...
Total consumer surplus in the market is
RM 60 + RM 20 = RM 80
...
•
Figure 2a uses the demand curve to compute
consumer surplus
...
•
The area above the price and below the
demand curve equals to RM40 which is exactly
the consumer surplus when 1 album is sold
...
The area above an d below the demand curve
equals the total area of the two rectangles: A’s
consumer surplus at this price is RM60 and B’s is
RM20
...
DEMAND CURVE AND CONSUMER SURPLUS
Thus, the area below the demand curve and
above the price measures the consumer surplus in
a market
...
DEMAND CURVE AND CONSUMER SURPLUS
The difference between the willingness to pay
and the market price is each buyer’s consumer
surplus
...
How a lower price raises consumer surplus?
Figure 3 shows a typical demand curve
...
How a lower price raises consumer surplus?
At a price of P1, the consumer surplus is the
area of triangle ABC ( the area above the
price and below the demand curve)
...
In a
market with many buyers, the resulting steps from
each buyer dropping out are so small that they
form, in essence a smooth curve
...
How a lower price raises consumer surplus?
Suppose the price falls from P1 to P2, the
consumer surplus now equals to the area
ADF
...
How a lower price raises consumer surplus?
BCED – Consumer surplus of those buyers
who were already buying Q1 of the goods
at the higher price P1 are better off because
they now pay less
...
The quantity demanded in the
market increases from Q1 to Q2
...
Consumers are the best judges of how much
benefit they receive from the goods they buy
...
g
...
CONCLUSION
In most markets, however, consumer surplus does
reflect economic well beings
...
Rational people do the best they can to
achieve their objectives, given their opportunities
...
Exercise
1a
...
What does consumer surplus measure?
2a With the help of an example, explain the concept of
consumer surplus individually and at market level
...
Title: Microeconomics-efficiency and fairness of market
Description: market fair. Robert Nozick(1974) argued that fairness requires two rules. compromise. consumer surplus. demand curve. How a lower price raises consumer surplus. What does consumer surplus measure
Description: market fair. Robert Nozick(1974) argued that fairness requires two rules. compromise. consumer surplus. demand curve. How a lower price raises consumer surplus. What does consumer surplus measure