Section_Notes_2_jenny - Section Notes 2 January 30, 2009...

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Unformatted text preview: Section Notes 2 January 30, 2009 Solving for Equilibrium: 4 Major Cases We have 2 functions for demand and supply, Demand is P = D(Q) and supply is P = S (Q). Supply is also assumed to be equal to the marginal cost curve. The following steps can be applied when solving for equilibrium using graphs or math. You should know how to show marginal revenue and marginal outlay on a graph. Competitive Equilibrium 1. Solve for Q∗ by setting D(Q) = S (Q). We can also think of this as marginal (social) benet equals marginal cost. 2. Use Q∗ to nd P ∗ = D(Q∗ ) = S (Q∗ ) Monopoly 1. The monopoly sets QM by maximizing prots, or setting M R = M C , ·D where M C = S (Q) and M R = ∂ (Q∂Q(Q)) . 2. Use QM to solve for PM = D(QM ) Monopsony 1. The monopsony sets QM by setting M B = M O, where M B = D(Q) ·S ( and M O = ∂ (Q∂Q Q)) . We can think of M B as marginal benets, or the marginal benet for purchasing one more unit and M O is marginal outlay, or the marginal increase in outlay (expenditure) for purchasing one more unit. 2. Use QM to solve for PM = S (QM ) 1 Middleman 1. The middleman sets QM by setting M R = M O, or setting the increase in revenue from selling one unit equal to the marginal increase in outlay from buying one unit. From above we know that M R = M O can be ·S ( ·D represented as ∂ (Q∂Q(Q)) = ∂ (Q∂Q Q)) 2. The middleman will buy QM for PM B = S (QM ) and will sell QM for PM S = D(QM ) Negative Externalities Show negative externality under competitive equilbrium graphically, including social benet, social cost, social welfare, deadweight loss Go through Examples: (1) Standard (2) Subsidy (3) Tax (4) Tax w/Dierent Elasticities: In each scenario, give class a few minutes to calculate ∆Social Benet, ∆Social Cost, ∆Social Welfare, ∆Deadweight loss, ∆Govt Revenue, ∆Producer Surplus, ∆Consumer Surplus 2 ...
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Section_Notes_2_jenny - Section Notes 2 January 30, 2009...

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