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Public Finance: Elasticity of Demand, Profit Maximization, and Social Welfare, Lecture notes of Economics

Grinnell CollegeEconomics

The concepts of elasticity of demand, profit maximization, and social welfare in the context of public finance. It explains how the elasticity of demand impacts the shape of the demand curve and the firm's response to price changes. The document also discusses the relationship between the demand curve, marginal cost curve, and profit, as well as the concept of social efficiency and the role of the competitive equilibrium in maximizing it.

What you will learn

  • What are the first and second fundamental theories of welfare economics and how do they relate to social efficiency?
  • How is profit maximized in a market and what role does marginal cost and marginal revenue play?
  • What is the elasticity of demand and how does it affect the demand curve?

Typology: Lecture notes

2017/2018

Uploaded on 05/13/2018

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Friday, February 2, 2018
ECN - Public Finance
Subject!
-Elasticity of Demand!
•When the elasticity of demand is zero, the demand curve is perfectly inelastic,
which case:!
-The demand curve is vertical, and the quantity demand does not change when
price rises.!
-Supply Curves!
•Demand Curve -> WTP!
•Supply Curve -> Marginal Cost Curve!
-Cost of producing each additional unit.!
•PROFIT = Total Revenue - Total Cost!
-Profit is maximized when MC = MR!
-Profit Maximization!
•Profit Max = MR = MC where marginal profit = 0!
•Marginal Productivity:!
-The impact of a unit change in any input, holding other factors constant, on the
firm’s outputs.!
•Marginal Profit:!
-Marginal Revenue - Marginal Cost!
-Equilibrium:!
•Social Efficiency Maximum at equilibrium.!
•Social Efficiency = Consumer Surplus + Producer Surplus!
-First Fundamental Theory of Welfare Economics:
•The competitive equilibrium, where S = D, maximizes social efficiency.!
-Second Fundamental Theory of Welfare Economics:
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Download Public Finance: Elasticity of Demand, Profit Maximization, and Social Welfare and more Lecture notes Economics in PDF only on Docsity!

Friday, February 2, 2018

ECN - Public Finance

Subject

- Elasticity of Demand

• When the elasticity of demand is zero, the demand curve is perfectly inelastic,

which case:

- The demand curve is vertical, and the quantity demand does not change when

price rises.

- Supply Curves

• Demand Curve -> WTP

• Supply Curve -> Marginal Cost Curve

- Cost of producing each additional unit.

• PROFIT = Total Revenue - Total Cost

- Profit is maximized when MC = MR

- Profit Maximization

• Profit Max = MR = MC where marginal profit = 0

• Marginal Productivity:

- The impact of a unit change in any input, holding other factors constant, on the

firm’s outputs.

• Marginal Profit:

- Marginal Revenue - Marginal Cost

- Equilibrium:

• Social Efficiency Maximum at equilibrium.

• Social Efficiency = Consumer Surplus + Producer Surplus

- First Fundamental Theory of Welfare Economics:

• The competitive equilibrium, where S = D, maximizes social efficiency.

- Second Fundamental Theory of Welfare Economics:

Friday, February 2, 2018

  • Society can attain any efficient out one by suitably redistributing resources among individuals and then allowing them to freely trade.
    • (^) Difficult to redistribute like this. - (^) Social Welfare Function:
  • A function that combines the utility functions of all individuals into an overall social utility function
  • (^) Utilityrian Social Welfare Function maximized sum of individual utility - (^) Commodity Egalitarianism:
  • The principle that society should ensure that individuals meet a set of basic needs, but that beyond that point income distribution is irrelevant. - (^) Equality of opportunity:
  • Measures taken by an organization to ensure fairness in the employment process. Opportunity that ensures equality. - (^) TANF
  • Without TANF, labor market is competitive.