ch 10_Econ 281_Fall_2010

ch 10_Econ 281_Fall_2010 -...

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Chapter 10:  Competitive Markets: Applications Chapter 10:  Competitive Markets: Applications
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1. Competitive market Efficiency: A Perfectly Competitive Market Maximizes Total Surplus 2. Government Intervention 3 . Examples of Various Government Policies Excise Taxes/ Subsidies Price Ceilings/Price floors Production Quotas/Import Tariffs
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Definition: Economic Efficiency means that the total surplus is maximized. The perfectly competitive equilibrium determines price and quantity such that the market attains economic efficiency.
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Short Run market Demand and Market Supply Demand Supply Q P Q* P* A B C D Q 1 Consumer's Surplus at (Q*,P*): ABC Producer's Surplus at (Q*,P*) :  DBC Total Surplus at (Q*,P*):   ADC 
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TS= Total Surplus = CS+PS At the Perfectly Competitive Equilibrium, (Q*,P*), TS  is maximized. FACT: If for any reason the quantity produced is larger or lower than Q* the Total Surplus falls. Ad some DEADWEIGHT LOSS (DWL) arises. (Shaded area in next two diagrams) If the quantity produced is larger than Q* we say that there is OVERPRODUCTION in the market If the quantity produced is smaller than Q* we say that there is UNDERPRODUCTION in the market
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Example:   UNDERPRODUCTION Quantity Q 1  <Q* is produced  Demand Supply Q P Q* P* A B C D Q 1 DEADWEIGHT LOSS arises because the units between Q and Q* could entail positive total surplus but miss to be produced.
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Demand Supply Q P Q* P* A B C D Q 2 Example:   OVERPRODUCTION Quantity Q 2  >Q* is produced  DEADWEIGHT LOSS arises because the units between Q* and Q 2 cost more (MC) than what they are valued (DEMAND=Willingness to pay) TS decreases as these units are a waste
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DWL and Government Intervention The government might intervene in the market and affect the price and quantity produced in a competitive market Definition: Net Benefit= CS+PS+Government revenues (or expenditure) If the markets are perfectly competitive, a government intervention might create DWL DWL= [Net Benefit before government intervention ]-[Net Benefit after government intervention ]
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Why does the government intervene? An efficient market needs not to be fair. Fairness and efficiency are distinct concepts. We will examine these Government Policies Excise Taxes/ Subsidies Price Ceilings/Price floors Production Quotas/Import Tariffs Efficiency is not the same thing of fairness
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Definition:   An  excise tax  (or a  specific tax ) is an  amount paid by either the consumer or the producer  per unit of the good at the point of sale.   P S is the price that the seller receives when the good is sold P D is the price that the buyers pays when she buys the good P D = P S +T (The amount paid by the demanders exceeds  the   total amount received by the sellers by amount T)
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Excise tax 1. With no tax, the price of a CD player is $100 and 5,000
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This note was uploaded on 10/04/2011 for the course ECON 281 taught by Professor Marchand during the Spring '10 term at University of Alberta.

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ch 10_Econ 281_Fall_2010 -...

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