Summarized from Greg Mankiw’s Principles of Economics, Chapter 7 of 36 CHAPTER 7 - CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS Section 12 of chapter 7 A social/government planner · cannot increase total surplus = economic well-being… · by changing the allocation of consumption among buyers… · or by changing the allocation of production among sellers… · because any change away from the equilibrium will decrease total surplus Figure 8 here Figure 8 illustrates this truth. The demand curve shows the value to buyers. The supply curve shows the cost to sellers. Starting at any Q1, at any quantity below the equilibrium quantity · the value to the marginal buyer exceeds the cost to the marginal seller · increasing the quantity produced and consumed would raise total surplus · increase in total surplus continues until equilibrium quantity is reached Starting at any Q2 quantity above the equilibrium quantity · the value to the marginal buyer is less than the cost to the marginal seller · decreasing the quantity produced and consumed would raise total surplus · increase in total surplus continues until equilibrium quantity is reached To maximize total surplus, the social planner · would have to choose the quantity and price where the supply and demand curves intersect… · which is where the free market arrives without intervention from the planner This policy of government non-intervention in the economy is often called “laissez faire,” the French translates as "allow them to do." If a social planner wanted to choose an efficient allocation of resources, rather than relying on market forces, he/she would need to know for all markets · the value of every good to every potential consumer · the cost of every good for every potential producer The task is impossible, and is why centrally planned economies, e.g. the U.S.S.R., fail miserably. Per Adam Smith’s “invisible hand,” free markets · take into account all information about buyers and sellers · naturally guide markets, and the overall economy, to the most efficient outcome and maximum total surplus = maximum wealth … 中央計画経済は無残に失敗する ちゅうおうけいかくけいざいはむざんにしっぱいする centrally planned economies fail miserably
Posted on: Thu, 03 Oct 2013 11:28:54 +0000
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