Class summary 11/28
Some properties of equilibrium price
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.
Central planners simply don't have all the information to make every single decision right.
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.
Central planners simply don't have all the information to make every single decision right.
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