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Microeconomics 2

Microeconomics 2. Lecture 2 Gains from exchange. Who will win the Nobel Prize in economics in 2013? In 2012 - below. Lloyd Shapley. Al Roth. See the Guardian video. What did I ask you to do?.

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Microeconomics 2

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  1. Microeconomics 2 Lecture 2 Gains from exchange

  2. Who will win the Nobel Prize in economics in 2013?In 2012 - below Lloyd Shapley Al Roth See the Guardian video

  3. What did I ask you to do? • Recall/find the definition of a reservation price for a buyer (perhaps you used a different expression for it?). • Recall/find the definition of a reservation price for a seller(perhaps you used a different expression for it?). • Assume a discrete good – single units. • You might also have done this below: • Recall/find the definition of surplus for a buyer. • Recall/find the definition of surplus for a seller.

  4. Today’s lecture • We are going to study some different exchange/market mechanisms; is there a ‘best’? • In the olden days, when there were not many students, I used to get the students to play a little game. • I cannot do it here as there are too many of you, but you can imagine it. • And you could do it with your friends tonight.

  5. An imaginary market/an experiment • Buyers and Sellers, a discrete good. • Each Buyer wants to buy at most one unit. • Each Seller wants to sell at most 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.

  6. 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. • We will formalise this later. • Both want to maximise their surplus.

  7. A Particular Market Mechanism • Bilateral Trades • Buyers and Sellers negotiate individually and see if they can agree on a price. • I asked students to pretend that this was a real experiment and I would pay them their surpluses. • So for the buyers I would pay the difference between the reservation price and the price paid; and for the buyers I would pay the difference between the price recieved and the reservation price.

  8. What do you think of this exchange mechanism? • What do you think of it? • Do you think it might be efficient? • Do you think that it might be fair? • There are lots of other market mechanisms. • Is there a ‘best’? • Let us study a particular mechanism – a competitive market – in which a price is chosen such that the demand equals the supply. • What are the properties of this mechanism? • Let us go to the html file.

  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. • You should also think of other exchange mechanisms and see if they are efficient and/or fair.

  10. Goodbye!! • See you next week.

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