Theory of Capitalism
Gene Chang
Idealistic market
•
•
•
•
Invisible hands
Coordinate the demand and supply
Leads to the harmony
Efficiency
Market efficiency
• Demand: Marginal demand
– How much consumers value the goods
• Supply: Marginal cost
– How much cost firms to produce
• The consumer values the most and the producer
produces at the least cost will stay at the market
Partial equilibrium
• Equilibrium in just one market
Price
Supply
Marginal Cost
P
Demand
Marginal utility
Q*
Quantity
Market effociency
Price
Supply
Marginal Cost
Value
to
buyers
Cost
to
sellers
Value
to
buyers
Cost
to
sellers
0
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Value to buyers is less
than cost to sellers.
Demand
Marginal utility
Quantity
Consumer and Producer Surplus is maximized in the Market
Equilibrium
Price A
D
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
General equilibrium
• General equilibrium is the state where all
markets in the economy are simultaneously in
equilibriums.
• Arrow and Debreu proved the existence of the
general equilibrium in fairly weak conditions.
• Social optimal. Using a social production
possibilities frontier (PPF) and social
indifference curve (IC) to illustrate.
Multiple persons
• It is also proved that G.E. and its properties are
valid for the multiple individuals case.
• The Edgeworth box
• Pareto improvement
– A movement to increase the welfare of at least one
individual without reduce welfare of others
• Pareto efficience
– A state no further Pareto improvement is possible
drink
Edgeworth box and contract curve
Ph/Pd
A’s Indifference
curves
A’s endowment
0
A
Hamburgers
Edgeworth box and contract curve
drink
B’s endowment
B’s Indifference curves
0
B
Hamburgers
drink
Pareto improvement
B
Contract
curve
0
A
hamburgers
drink
Pareto efficiency and
contract curve B
Ph/Pd
Contract
curve
0
A
hamburgers
Market failures
•
•
•
•
Existence of monopoly
Existence of externality
Existence of asymmetric information
Macroeconomic instability
Pollution
Pollution and
and the
the Social
Social Optimum
Optimum
Price of
Aluminium
Social costs
Cost of
pollution
Supply
(private costs)
Optimum
Equilibrium
Demand
(private value)
0
Qoptimum
Qmarket
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Quantity of
Aluminium
Chapter 10: page 14
Technology
Technology Spillovers
Spillovers and
and the
the Social
Social
Optimum
Optimum
Price of
Robots
Value of
technology
spillover
Supply (private costs)
a
Social costs
Pmarket
Equilibrium
Poptimum
Optimum
b
Deadweight
loss
0
Qmarket
Demand
(private value)
Qoptimum
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
Quantity of
Robots
Chapter 10: page 15
The
The Equivalence
Equivalence of
of Pigovian
Pigovian Taxes
Taxes
and
Permits.
and Pollution
Pollution
Permits.
(b) Pollution Permits
(a) Pigovian Tax
Price of
Pollution
Supply of
pollution
permits
P
Pigovian
Tax
P
1. A Pigovian
sets the price of
pollution…
2. … which
together with
the demand
curve,
determines the
price of
pollution…
Demand for
pollution rights
Demand for
pollution rights
2. … which together with the demand
curve, determines the quantity of
pollution…
0
Q
0
Quantity of
Pollution
Mankiw et al. Principles of Microeconomics, 2nd Canadian Edition
1. … Pollution permits set the
quantity of pollution…
Q
Quantity of
Pollution
Chapter 10: page 16