Lecture_12_final

Lecture_12_final - 1 Lecture 12 Chapter 9: The Analysis of...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 Lecture 12 Chapter 9: The Analysis of Competitive Markets 2 Roadmap Now we have model of supply and demand and measures of CS and PS to evaluate Gains and Losses from Government Policies Minimum price Maximum price Supply restriction Tax, subsidy The Efficiency of a Competitive Market 3 Consumer and Producer Surplus When government controls price, some people are better off May be able to buy a good at a lower price But what is the effect on society as a whole? Is total welfare higher or lower and by how much? A way to measure gains and losses from government policies is needed 4 Consumer and Producer Surplus 1. Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good Assume market price for a good is $5 Some consumers would be willing to pay more than $5 for the good If you were willing to pay $9 for the good and pay $5, you gain $4 in consumer surplus 5 Consumer and Producer Surplus 1. Producer surplus is the total benefit or revenue that producers receive beyond what it costs to produce a good Some producers produce for less than market price and would still produce at a lower price A producer might be willing to accept $3 for the good but get $5 market price Producer gains a surplus of $2 6 Consumer and Producer Surplus Between 0 and Q producers receive a net gain from selling each product-- producer surplus. Consumer Surplus Quantity Price S D Q 5 9 Between 0 and Q 0 consumer A receives a net gain from buying the product-- consumer surplus. Producer Surplus 3 Q D Q S 7 Consumer and Producer Surplus To determine the welfare effect of a governmental policy, we can measure the gain or loss in consumer and producer surplus Welfare Effects Gains and losses to producers and consumers Example: When government institutes a price ceiling, the price of a good cant go above that price 8 The loss to producers is the sum of rectangle A and triangle C B A C Consumers that can buy the good gain A Price Control and Surplus Changes Quantity Price S D P Q P max Q 1 Q 2 Consumers that cannot buy, lose B Triangles B and C are losses to society dead weight loss 9 Price Controls and Welfare Effects The total loss is equal to area B + C The deadweight loss is the inefficiency of the price controls the total loss in surplus (consumer plus producer) If demand is sufficiently inelastic, losses to consumers may be fairly large This can have effects in political decisions 10 B A P max C Q 1 With inelastic demand, triangle B can be larger than rectangle A and consumers suffer net losses from price controls. S D Price Controls With Inelastic Demand Quantity Price P Q 2 11 Rent Control in NYC An Example of a Price Ceiling Rent control arose during WWII in response to mass disruptions caused by war After war, NYC and many European jurisdictions retained versions of rent control out of fear that return of troops would send rents skyward 12...
View Full Document

This note was uploaded on 05/24/2008 for the course ACC 203 taught by Professor Choi during the Spring '08 term at NYU.

Page1 / 48

Lecture_12_final - 1 Lecture 12 Chapter 9: The Analysis of...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online