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The Jungle by Upton Sinclair. Things Fall Apart by Chinua Achebe. The novel was an integral part of the drive for social reform at the start of the last century. The Grapes of Wrath by John Steinbeck. Beloved by Toni Morrison.
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Enslavement and Industrialisation
Shain Shapiro 11 Sep When the market for bread is in equilibrium with the quantity of loaves supplied equal to the quantity demanded, the total surplus is the area below the demand curve and above the supply curve. Notice how the equilibrium allocation in this market differs from the allocation of a differentiated product, Beautiful Cars, in Unit 7. The equilibrium quantity of bread is at the point where the market supply curve, which is also the marginal cost curve, crosses the demand curve, and the total surplus is the whole of the area between the two curves.
Figure 7. The competitive equilibrium allocation of bread has the property that the total surplus is maximized. There would be consumers without bread who would be willing to pay more than the cost of producing another loaf, so there would be unexploited gains from trade.
The total gains from trade in the market would be lower. We say there would be a deadweight loss equal to the triangle-shaped area. Producers would be missing out on potential profits, and some consumers would be unable to obtain the bread they were willing to pay for. Leibniz: Gains from trade.
And if more than 5, loaves were produced, the surplus on the extra loaves would be negative: they would cost more to make than consumers were willing to pay. Joel Waldfogel, an economist, gave his chosen discipline a bad name by suggesting that gift-giving at Christmas may result in a deadweight loss.
Do you agree? At the equilibrium, all the potential gains from trade are exploited, which means there is no deadweight loss. This property—that the combined consumer and producer surplus is maximized at the point where supply equals demand—holds in general: if both buyers and sellers are price-takers, the equilibrium allocation maximizes the sum of the gains achieved by trading in the market, relative to the original allocation.
We demonstrate this result in our Einstein at the end of this section. At the competitive equilibrium allocation in the bread market, it is not possible to make any of the consumers or firms better off that is, to increase the surplus of any individual without making at least one of them worse off. Provided that what happens in this market does not affect anyone other than the participating buyers and sellers, we can say that the equilibrium allocation is Pareto efficient.
The participants are price-takers. They have no market power. When a particular buyer trades with a particular seller, each of them knows that the other can find an alternative trading partner willing to trade at the market price. Hence the suppliers will choose their output so that the marginal cost the cost of the last unit produced is equal to the market price. In contrast, the producer of a differentiated good has bargaining power because it faces less competition: no one else produces an identical good.
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The firm uses its power to keep the price high, raising its own share of the surplus but lowering total surplus. The price is above marginal cost, so the allocation is Pareto inefficient. The exchange of a loaf of bread for money is governed by a complete contract between buyer and seller. We will see in Unit 9 that this leads to a Pareto-inefficient allocation in the labour market. We have implicitly assumed that what happens in this market affects no one except the buyers and sellers. To assess Pareto efficiency, we need to consider everyone affected by the allocation.
Then, we may conclude that the equilibrium allocation is not Pareto efficient after all. We will investigate this type of problem in Unit Remember from Unit 5 that there are two criteria for assessing an allocation: efficiency and fairness. Even if we think that the market allocation is Pareto efficient, we should not conclude that it is necessarily a desirable one.
What can we say about fairness in the case of the bread market? We could examine the distribution of the gains from trade between producers and consumers: Figure 8. You can see that this happens because the demand curve is relatively steep compared with the supply curve. Recall also from Unit 7 that a steep demand curve corresponds to a low elasticity of demand. Similarly, the slope of the supply curve corresponds to the elasticity of supply: in Figure 8. In general, the distribution of the total surplus between consumers and producers depends on the relative elasticities of demand and supply.
The Pareto efficiency of a competitive equilibrium allocation is often interpreted as a powerful argument in favour of markets as a means of allocating resources.follow site
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But we need to be careful not to exaggerate the value of this result:. Consider a market for the tickets to a football match. Six supporters of the Blue team would like to buy tickets; their valuations of a ticket their WTP are 8, 7, 6, 5, 4, and 3. Six supporters of the Red team already have tickets, for which their reservation prices WTA are 2, 3, 4, 5, 6, and 7. In Figure 8. Which of the following statements are correct? However the market works, and whatever prices are paid, we can calculate the consumer surplus by adding together the differences between WTP and price paid for all the people who buy, and the producer surplus by adding together the difference between price received and marginal cost of every unit of output:.
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When buyers and sellers are price-takers, and the price equalizes supply and demand, the total surplus is as high as possible, because the consumers with the highest WTPs buy the product and the units of output with the lowest marginal costs are sold. And if we tried to include any more units of output in this calculation, the surplus would also go down because the WTPs would be lower than the MCs.
Quinoa is a cereal crop grown on the Altiplano, a high barren plateau in the Andes of South America. It is a traditional staple food in Peru and Bolivia. In recent years, as its nutritional properties have become known, there has been a huge increase in demand from richer, health-conscious consumers in Europe and North America.
Figures 8. You can see in Figures 8. Jose Daniel Reyes and Julia Oliver. The Trade Post. For the producer countries these changes are a mixed blessing. While their staple food has become expensive for poor consumers, farmers—who are amongst the poorest—are benefiting from the boom in export sales.
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Other countries are now investigating whether quinoa can be grown in different climates, and France and the US have become substantial producers. How can we explain the rapid increase in the price of quinoa? In this section, we look at the effects of changes in demand and supply in our simple examples of books and bread. At the end of this section you can apply the analysis to the real-world case of quinoa. In the market for second-hand textbooks, demand comes from new students enrolling on the course, and supply comes from students who took the course in the previous year.
Suppose that in one year the course became more popular. At the original levels of demand and supply, the equilibrium is at point A. If there were more students enrolling in one year, there would be more students wanting to buy the book at each possible price. The demand curve shifts to the right.
Related The English Book Trade: An Economic History of the Making and Sale of Books
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