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Principles of Microeconomics


Market Efficiency


The concept of market efficiency is an important tool used in the field of welfare economics, which studies whether markets and/or government interventions improve the well-being of society. Put differently, the goals are to determine whether the free-market price is the "right" price and whether the free-market quantity is the “right” quantity. That is, we want to determine whether the equilibrium price of a good is too high, too low or just right. Likewise, we want to know whether the equilibrium quantity is too high, too low or just right. In order to determine whether the price and quantity for a good are optimal, we must use a measure of market efficiency. The measure of efficiency is based on the sum of consumer and producer surpluses, which is simply referred to as total surplus. The Pecasts for this topic include the following: how consumer surplus is defined, identified graphically and computed; how producer surplus is defined, identified graphically and computed; how price changes affect consumer and producer surplus; how total surplus is defined and identified graphically; and the conclusions from such a welfare analysis are qualified based on the assumptions that are made.


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Consumer Surplus

This Pencast defines consumer surplus, show how to identify consumer surplus graphically, shows to compute a dollar value consumer surplus, and illustrates the impact of a decrease in the price of a good on consumer surplus. [Play Pencast]


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Producer Surplus

This Pencast defines producer surplus, show how to identify producer surplus graphically, shows to compute a dollar value for producer surplus, and illustrates the impact of an increase in the price of a good on producer surplus. [Play Pencast]


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Total Surplus

This Pencast defines total surplus, shows how to identify total surplus graphically, and discusses how the free market maximizes market efficiency under certain assumptions. [Play Pencast]


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