Microeconomics by ert554898

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									Microeconomics

     Lecture 2
Gains from exchange
       Attention!
• I am giving each of you a piece of
  paper.
• On it is written information useful
  to you and private.
• Do NOT show it to anyone else!!!
          An Imaginary Market
• Buyers and Sellers.
• Each Buyer wants to buy one unit.
• Each Seller wants to sell one unit.
• Each Buyer has a reservation price for the one
  unit – this is the maximum that he or she will
  pay for that one unit.
• Each Seller has a reservation price for the one
  unit – this is the minimum that he or she will
  accept for that one unit.
               Profit/Surplus
• The profit/surplus of a buyer is the difference
  between the reservation price and the price
  paid.
• The profit/surplus of a seller is the difference
  between the price received and the
  reservation price.
• Both want to maximise their surplus.
   A Particular Market Mechanism
• Bilateral Trades
• Buyers and Sellers negotiate individually and see if
  they can agree on a price.
• Pretend that this is a real experiment and I will pay
  you your surpluses:
• So for the buyers I will pay the difference between
  the reservation price and the price paid; and for the
  buyers I will pay the difference between the price
  recieved and the reservation price.
          Are you ready?
• You should find someone who will
  trade with you and you should
  agree on the price.
• OK: GO!!!
• If you agree a trade with someone,
  come to me and we will write the
  details on the computer here.
Buyer   Reservation Seller   Reservation Price    Profit of Profit of
        price of             price of    agreed   buyer     seller
        buyer                seller
Information not normally available
•   Imagine that there are
•   10 buyers with a reservation price of £10
•   10 buyers with a reservation price of £20
•   ...
•   10 buyers with a reservation price of £100

•   10 sellers with a reservation price of £10
•   10 sellers with a reservation price of £20
•   ...
•   10 sellers with a reservation price of £100
      We have studied a particular
             mechanism
• What do you think of it?
• Is it efficient?
• Is it fair?

• Let us now study another mechanism – a
  competitive market – in which a price is chosen
  such that the demand equals the supply.
• What are the properties of this mechanism?
   Properties of Competitive Market
              Mechanism
• Total surplus is maximised.
• With any other single price (not a competive
  equilibrium price) the total surplus is less.
• So this mechanism maximises the total surplus
  extracted from the market.
• Note however that it says nothing about the
  distribution of the surplus or whether it is a
  fair mechanism.
               Goodbye!!



• See you tomorrow.

								
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