Lecture 1 :

the production possibilities frontier

computers

-
produced there
only possible
when
D

F :
2200 &

is an advance in
technology
2000
B

1000 D

⑨ D & B

500 600 800 100 Cars

produced

poverty
line three times cost of providing an adequate diet.
·
povetry :

size)
(depending on
Family

o
example :

.
in 2004
$66 632 (annual income
+ median family income :

+ poverty line for family of Four : $24918

+
poverty late : 14,487

the adequate diet price

.
>
-

computing
solution
-

X
poverty = 3 price >
-
.

OF an
line
adequate
diet
Family
Four
of
C3 . X .
365 -numberoef ar ()x = $5, 57
 law
The minimum wage

wage M

/
O
2 /
/- surplus - (S)D)
/
/
/S unemployment
minimum wage
/ /
Y
S
S The minimum
III//
⑨
1
law
wage :
market price ① equilibrium
is set above
1
the equibrium

D
wage
&

a
·

QS law
QD m
labour labour
demand market supplied
(those
Ithose who

alloyed quantity look for jobs)

what can be intepreted through the diagram :

reduce
reduce the difference
D: minimum wage - Income
in income between -
inequali ty
·

lau
skilled
high and low

labour

↓
low skilled labours
high a

are employeed ???

receive the above minimum

② pink area -> those who
law
wage
↓
who
to pay this for those
Firms are willing
skills
have high
 market if I were if the price any lower
.
any
.
higher · total producer surplus
· total consumer surplus I sum of > producer surply)
(eum Of > consumer surplus

I
How a lower price raises How A
higher prices raises
consumer surplus ? producer surples ?
- price
1

·
-
In
---

iY
E
E C /
8
-

, "
⑨ S
P1 /
L
&
//
S

L
⑧ 11 O
-----
⑨
S
F C
Pe

~ ·
⑧ Q1 Q2 O
consumer O Vaz
Q1
new
quantity
· initial consumer surplus new
seller
· WTP of marginal buyer
·. initial producer surplus
Flow reasoning :
of · WTP of marginal seller
demand
+ law of
Flow of reasoning :

↓ price ↓
>
quantity supply
-

+law of :

demanded
>
-
↑ price > ↑ -

quantity supplied
consumer surplus to
producer surplus
·
· to
new consumers
nau seller
· additional consumer
to initial
· additional producer
surple to initial
surplus
consumer surplus
seller surply
.
 CS WTP P PS = R 1 10 20
-

=
WTS
-
.
.

= 40 -

30 = 16
20
0$100
-
=

c) CS increase due to buyers

market (pink 20
entering the
=

area) :
c) producer surplus
consumer
increase due to selling
b h
purples =
E .
.

5 additional units :
increase
= 1 .
BD . DC

20) (20-10)
producer
= 2 .
(30 -

surples z b h .
= z
=
.

increase
2
= . 10 .
10

= 55 - =
E .
BC .
BA

.
d CS increase due to exsistib 1 (15 10)
-

= .
.

lower
buyers paying price . (30-207

consumer
=
2 .
5 . 10

surplus I rectangle ABCD = 25

increase
supply ???
=
EF FD .
① higher
= (30 -
20) .
(10 0) -

= 10 .
10

-
100 10 100
10
=
= .

un
rectangle
=> efficiency is when an allocation of resources maximizes the total
.
surplus

Evaluating THe maRKeT equilibrium

o3 market outcomes :

markete allocate supply

the of goods to
1 Free
.

who value them

buyers
(measured
most highly
in WTP

Free markets allocate the demand for goods

2
.

to sellers who
the can

produce them at

least .
cost

the quantit of goods

3
. Free markets produce of consumer and
the sum
that maximize
producer surples
.

the sum of
maximize
① > equilibrium
producer surphy
.
a
consumer
 loss
Leadweight : created by market

inefficiency
↳ occurs when supply and
demand are out of equilibrium

cause s

Y
control
price ceiling price OF
minimum wage weight
price floors dead
:

taxation 1088

price supply

A
12 price Floor S

·
.

K
P1-
-
.
*
Equilibrium
C

8
- -

Q2
B

"Mas demand
>
quantit

I
·
consumer semply
·
producer surphy
 12 CAB :
P2P1 BL t 11C .
BC
un
um
taxation & 0Q2
gou 0QL
received um
-
tax cons
tax supply
paid
paid
ABE
AK .
EKE +
BK .

1 · KE
deadweight
-

loss - um
loss since Loss Since

consumer producer
left left

subsidy