Class #7, 2/9/12

• Today in class, we worked a lot with supply/demand curves and the areas under curves (see notes for examples).
• Embedded in our values is our income and what we can afford. Income is a reasonable way to decide who gets what good.
• Prof. Rizzo gave us a curve about apples. Let's say there is a rich guy (Income= $1 million) and a poor guy (Income= $1,000). Sure, the poor guy would enjoy the apple, but if both men want the apple, the rich guy would always outbid the poor guy.
• If you just give the apple to the poor guy because you feel bad that he is poor, he knows that he can resell the apple. Because of his rational self-interest, he'd take the apply and sell it right back to someone else, even if the rich guy really wanted it, simply because the poor guy values the money for the apple more than the apple itself. 
• The free market is great because it allows you to do what is in your best interest. If a rich man values an apple at $500 and poor guy values it at $2. If rich guy buys the apple for $1, society is $499 wealthier because now he can spend his money on other things and society is richer by $1 for the apple that was bought. If it is sold to the poor person, society is $1 richer because that is all the poor man valued it at.
• If we give the apple to the poor, we are wasting charity/effort for society because we are just making an apple to give away. Instead of producing this apple, we could be making something else that could be of more value to society, such as medicine, etc.
• See curves in notes to see about area under curves.
• Total welfare a person gains from trade = total value - total cost
• Net benefit you get from making a transaction = benefit - cost
• For producers -----> price- cost = how much better off you are by participating in a certain market over doing something else
• Allocative Role of Prices = price is a signal if something is worth it for a consumer to buy something. For a producer, prices helps them know if they should make another unit
• Producers- only those who can make a good below the market price would make it
• Prices don't matter when it comes to economic welfare.
• Consumer surplus = Total value - PQ
• Producer Surplus = PQ - Total Cost
• Total Value - Total Cost -----> see, prices don't end up in calculation
• Gain in trade comes from taking a resource and moving it from a low value state to a high value state, such as oil in the ground. Using it in ways we can make use of it.
• Dead weight loss = any decrease in a gain from trade. So if for whatever reason, a person doesn't make a transaction, this could lead to dead weight loss on the Supply/Demand curve.