Libertarianism

[Plow]

some very simple definitions you should probably give:

consumer surplus: how much less you're actually paying than you would be willing to pay. i.e. if you're paying $1 for a loaf of bread, and you would be willing to pay $2 if you had to, the consumer surplus is $2-$1=$1

producer surplus: how much more you're paying than the producer would be willing to sell for. i.e. if the producer would be willing to sell that bread for $.50, but you're paying $1, producer surplus is $1-$.50=$.50.

deadweight loss is a bit more complicated, but it's basically inefficiency, people buying shit that doesn't benefit them enough to justify the real cost of production because it's artificially cheap (maximizing consumer surplus), or people not being able to buy shit because the pricing that generates the most profit (maximizing producer surplus) is too high for the little benefit it offers them

[Pirian]

I'm not so sure I like your definition of deadweight loss. It's what could be produced (it's under the demand curve) but isn't produced because no one wants to buy any additional units at that price, and that price is allowed to persist because the firm has market power. You were absolutely correct in saying that it is inefficiency, though it is important to note that it is not necessarily inefficiency in the firm, but rather it is market inefficiency. This may be what you were trying to say, though

[Plow]

it's also the reverse though, right?

if people buy ears of corn for 10 cents due to subsidies, but it cost 20 cents to produce, while not filling 20 cents worth of their diet, that's deadweight loss as well, yeah?

same as if it cost 50 cents due to a monopoly so few were buying it and production potential is lost?


edit: or, the same could be cause by an extremely good year in terms of rain and weather, or an extremely bad year due to drought, or would that just be completely different?

[hey]

Yeah.

[Pirian]

Ahh I wasn't bringing in taxes. It's an unnecessary complication for the purposes here, but yeah you're correct. You're talking about a completely separate aspect of DWL, one which is brought upon by inefficiencies in transfer payments

[Plow]

k, so the definition for DWL as you're referring to is specifically like...

corn is worth, say, $.15 in terms of actual value to a diet

almost anyone is willing to pay .15 for it, but certain people are willing to pay .25 for it cuz, hey why not

company determines that the most profit is gained when rather than aiming for equilibrium, price reaches .25

price at .25 means lower demand, just not enough to make it "worth it" to them to lower the price, due to lack of competition, so production is decreased instead

profits maximized, "dead weight" lost

monopolization hurts the consumer because competition would mean that raising the price would lower demand significantly more, because people would simply buy the competitor instead, is your point, right?

[Pirian]

k, so the definition for DWL as you're referring to is specifically like...

corn is worth, say, $.15 in terms of actual value to a diet

almost anyone is willing to pay .15 for it, but certain people are willing to pay .25 for it cuz, hey why not

company determines that the most profit is gained when rather than aiming for equilibrium, price reaches .25

It is more like this:

Corn is worth $.25 to x number of people

Corn's cost is dropped by $.10 to $.15

Now, all the people who would have bought it at $.25 are more than happy to pay $.15 for it

Now you have x+n new people who are willing to buy it at the lower price (or simply buy more of it) because it is cheaper. This is a rightward shift in the supply curve
http://www.nikki_c.dsl.pipex.com/images/dd202/b2p.jpg
Demand in this example hasn't changed, only supply. This is a little more basic of a concept than we're talking about here, though.


The price point for monopoly is determined at the point where marginal cost equals marginal revenue. It's not that they couldn't make profit at a price of $.15, it is that they earn maximum profit at $.25, in this example. If there were competition in the market then they would have the split the quantity supplied but at the same time they are still trying to maximize profits, so the total amount produced will be higher than monopoly quantity, and the price will be lower than monopoly quantity (This duopoly created by the first split is what is covered by Cournot in the Cournot-Nash Equilibrium mentioned a page or so ago). The greater number of firms, the more quantity provided by each firm must be split, and the lower price is going to be.

monopolization hurts the consumer because competition would mean that raising the price would lower demand significantly more, because people would simply buy the competitor instead, is your point, right?

This is off a little. Monopolization hurts the consumer because competition would mean that raising price would lower demand to 0, because your competitor would gain full market share. Meaning, competition forces the firm to offer prices in line with their competitor, or risk losing all market share (this is, of course, assuming identical products), because people will simply buy the competitor instead

[guartz]

Looks like Austrian school disagrees with Chicago school on this subject.

http://mises.org/daily/1800

This is, after all, a libertarian thread.

[Pirian]

Not just Chicago, you're taking on Harvard here, too. But alas, I'm not going to argue against Austrian economics, because it's simply two different views and smarter men than we have already tried

[test123]

In his own words