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Microeconomics

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.

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Microeconomics

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  1. Microeconomics Lecture 2 Gains from exchange

  2. 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!!!

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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

  8. 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?

  9. 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.

  10. Goodbye!! • See you tomorrow.

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