Notes for Chapter 9 - Notes for Chapter 9: The Analysis of...

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Unformatted text preview: Notes for Chapter 9: The Analysis of Competitive Markets Pindyck and Rubinfeld - Microeconomics 1. Evaluating the Gains and Losses from Government Policies When we evaluate the gains and losses from government policies, such as price ceilings, price floors, import tariffs, minimum wages etc., consumer surplus and producer surplus are the standard tools for the analyses. 2. Review of Consumer and producer surplus Consumer surplus is the consumers maximum willingness to pay minus the total expenditures on the good. This is used to evaluate the consumers welfare. Producer surplus is the sum over all the units produced of difference between market price of the good and marginal cost of production. Producer surplus is used to evaluate the producers welfare. Producer surplus is the benefit that lower-cost producers enjoy by selling at the market price. 1 5 4 3 2 1 5 4 3 2 1 CS 2 = $ 1 CS 1 = $ 2 E 1 = $ 3 E 2 = $ 3 E 3 = $ 3 Price = $ 3 a b c q , Magazines per week p , $ per magazine Consumer Surplus for an individual consumer Demand p 1 p , $ per trading card q q , Trading cards per year Demand Expenditure, E Consumer surplus, CS Marginal willingness to pay for the last unit of output 2 Fall in Consumer Surplus from as Price Rises: p , per stem Q , Billion rose stems per year 57.8 32 30 1.16 1.25 b a A = $149.64 million B = $23.2 million C = $0.9 million Demand 3 Some real world data: 4 Producer Surplus: 4 3 2 1 4 3 2 1 PS 2 = $ 2 PS 3 = $ 1 PS 1 = $ 3 MC 2 = $ 2 MC 3 = $ 3 MC 4 = $ 4 MC 1 = $1 p Supply q , Units per week p , $ per unit (a) A Firm s Producer Surplus 5 p * p , Price per unit Q * Market supply curve Q , Units per year Market price Variable cost, VC Producer surplus, PS (b) A Market s Producer Surplus 6 Change in Producer Surplus due to a price change: Original Price P=$0.30 New Lower Price P=$0.21 Change in PS (in $ millions) Producer Surplus D+E+F F D E = $108.45 p , per stem Q , Billion rose stems per year E = $4.05 million 30 21 1.16 1.25 Supply b a D = $104.4 million F 7 We can show the consumer surplus and producer surplus on a demand-supply diagram. Price S Consumer surplus P EQ Producer surplus D Q EQ Output Welfare or Total Surplus = CS + PS Welfare is maximized at the competitive market equilibrium P and Q. (This, of course, assumes that there are no market failures or externalities.) On the next page, you will see two graphs, one with lower than equilibrium output, and one with higher than equilibrium output. At each of these (non-equilibrium Qs), total surplus (CS+PS) is less than that achieved at the competitive market equilibrium Q EQ . 8 Why Reducing Output from the Competitive Level Lowers Welfare: Why Increasing Output from the Competitive Level Lowers Welfare: p , $ per unit Q , Units per year Supply Demand p 2 MC 1 = p 1 Q 2 Q 1 e 1 MC 2 e 2 C E B D A F p , $ per unit Q , Units per year Supply Demand p 2 MC 1 = p 1 Q 2 Q 1 e 1 MC 2 e 2 C F B D E A G H +F 9 3. Welfare effects of price ceiling3....
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This note was uploaded on 04/19/2011 for the course ECON 101 taught by Professor Gul during the Spring '11 term at Lahore School of Economics.

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Notes for Chapter 9 - Notes for Chapter 9: The Analysis of...

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