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Ch09_Pindyckfinal

Ch09_Pindyckfinal - Chapter 9 The Analysis of Competitive...

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Chapter 9 The Analysis of Competitive Markets
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Dr. Carlos Asarta Chapter 9 2 Consumer and Producer Surplus 1. Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good 1. Producer surplus is the total benefit or revenue that producers receive beyond what it costs to produce a good
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Dr. Carlos Asarta Chapter 9 3 Consumer and Producer Surplus Between 0 and Q 0 producers receive a net gain from selling each product-- producer surplus. Consumer Surplus Quantity Price S D Q 0 5 9 Between 0 and Q 0 consumers receive a net gain from buying the product-- consumer surplus. Producer Surplus 3 Q D Q S
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Dr. Carlos Asarta Chapter 9 4 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
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Dr. Carlos Asarta Chapter 9 5 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 0 Q 0 P max Q 1 Q 2 Consumers that cannot buy, lose B Triangles B and C are losses to society – dead weight loss
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Dr. Carlos Asarta Chapter 9 6 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
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Dr. Carlos Asarta Chapter 9 7 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 0 Q 2
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Dr. Carlos Asarta Chapter 9 8 Price Controls and Natural Gas Shortages From example in Chapter 2, 1975 Price controls created a shortage of natural gas What was the effect of those controls? Decreases in surplus and overall loss for society We can measure these welfare effects from the demand and supply of natural gas
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Dr. Carlos Asarta Chapter 9 9 Price Controls and Natural Gas Shortages Q S = 14 + 2P G + 0.25P O Quantity supplied in trillion cubic feet (Tcf) Q D = -5P G + 3.75P O Quantity demanded (Tcf) P G = price of natural gas in $/mcf P O = price of oil in $/b
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Dr. Carlos Asarta Chapter 9 10 Price Controls and Natural Gas Shortages Using P O = $8/b and gives equilibrium values for natural gas P G = $2/mcf and Q G = 20 Tcf Price ceiling was set at $1/mcf Showing this graphically, we can see and measure the effects on producer and consumer surplus G S G D Q Q =
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Dr. Carlos Asarta Chapter 9 11 B A C The gain to consumers is rectangle A minus triangle B , and the loss to producers is rectangle A plus triangle C.
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