4. Competitive Markets: Efficiency in Economics

4. Competitive Markets: Efficiency

Is a competitive market a ‘good’ solution?

Study Parkin et al., Chapter 5

4.1 Economic Efficiency

· Resources allocation that is productively and allocativley efficient.

· Determining ‘efficiency’ requires a measure of value to society.

· Approach: measure value derived by consumers and producers.

4.2 Market Demand

· Market demand : the sum of individual household demand.

4.2.1 Efficiency: the demand side

· Value: the benefit obtained

· Price: the amount that is paid

· Marginal Benefit: addition to Total Benefit of consuming one more unit.

· Consuming more add to total benefits, but MB declines

· DD = maximum P consumers WTP for last unit consumed (Q)

· Therefore, DD curve is a MB curve

Consumer Surplus

· Market price is not always the maximum WTP.

· A consumer is asked:

o “If you could consume only one unit of a good, or none at all, how much would you be WTP?”

Total Benefit and Consumer surplus