The Analysis of Competitive Markets
اسلاید 1: Chapter 9The Analysis of Competitive Markets
اسلاید 2: Chapter 9Slide 2Topics to be DiscussedEvaluating the Gains and Losses from Government Policies--Consumer and Producer SurplusThe Efficiency of a Competitive MarketMinimum Prices
اسلاید 3: Chapter 9Slide 3Topics to be DiscussedPrice Supports and Production QuotasImport Quotas and TariffsThe Impact of a Tax or Subsidy
اسلاید 4: Chapter 9Slide 4Evaluating the Gains and Losses from Government Policies--Consumer and Producer SurplusReviewConsumer surplus is the total benefit or value that consumers receive beyond what they pay for the good.Producer surplus is the total benefit or revenue that producers receive beyond what it cost to produce a good.
اسلاید 5: ProducerSurplusBetween 0 and Q0 producers receive a net gain from selling each product--producer surplus.ConsumerSurplusConsumer and Producer SurplusQuantity0PriceSD5Q0Consumer C107Consumer BConsumer ABetween 0 and Q0 consumers A and Breceive a net gain from buying the product--consumer surplus
اسلاید 6: Chapter 9Slide 6To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus.Welfare EffectsGains and losses caused by government intervention in the market.Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus
اسلاید 7: Chapter 9Slide 7The loss to producers isthe sum of rectangleA and triangle C. TriangleB and C together measurethe deadweight loss.BACThe gain to consumers isthe difference betweenthe rectangle A and thetriangle B.Deadweight LossChange in Consumer and Producer Surplus from Price ControlsQuantityPriceSDP0Q0PmaxQ1Q2Suppose the governmentimposes a price ceiling Pmaxwhich is below the market-clearing price P0.
اسلاید 8: Chapter 9Slide 8Observations:The total loss is equal to area B + C.The total change in surplus = (A - B) + (-A - C) = -B - CThe deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus.Change in Consumer and Producer Surplus from Price Controls
اسلاید 9: Chapter 9Slide 9ObservationConsumers can experience a net loss in consumer surplus when the demand is sufficiently inelasticChange in Consumer and Producer Surplus from Price Controls
اسلاید 10: Chapter 9Slide 10BAPmaxCQ1If demand is sufficientlyinelastic, triangle B can be larger than rectangleA and the consumer suffers a net loss fromprice controls.ExampleOil price controlsand gasoline shortagesin 1979SDEffect of Price Controls When Demand Is InelasticQuantityPriceP0Q2
اسلاید 11: Chapter 9Slide 11Price Controls and Natural Gas Shortages1975 Price controls created a shortage of natural gas.What was the deadweight loss?
اسلاید 12: Chapter 9Slide 12Supply: QS = 14 + 2PG + 0.25POQuantity supplied in trillion cubic feet (Tcf)Demand: QD = -5PG + 3.75POQuantity demanded (Tcf)PG = price of natural gas in $/mcf and PO = price of oil in $/b.Price Controls and Natural Gas ShortagesData for 1975
اسلاید 13: Chapter 9Slide 13PO = $8/bEquilibrium PG = $2/mcf and Q = 20 TcfPrice ceiling set at $1This information can be seen graphically:Price Controls and Natural Gas ShortagesData for 1975
اسلاید 14: Chapter 9Slide 14BA2.40CThe gain to consumers is rectangle A minus triangleB, and the loss to producers is rectangleA plus triangle C.SD2.00Quantity (Tcf)0Price($/mcf)5101520253018(Pmax)1.00Price Controls and Natural Gas Shortages
اسلاید 15: Chapter 9Slide 15Measuring the Impact of Price Controls1 Tcf = 1 billion mcfIf QD = 18, then P = $2.40 [18 = -5PG + 3.75(8)]A = (18 billion mcf) x ($1/mcf) = $18 billionB = (1/2) x (2 b. mcf) x ($0.40/mcf) = $0.4 billionC = (1/2) x (2 b. mcf) x ($1/mcf) = $1 billionPrice Controls and Natural Gas Shortages
اسلاید 16: Chapter 9Slide 16Measuring the Impact of Price Controls1975Change in consumer surplus = A - B = 18 - 0.04 = $17.6 billionChange in producer surplus= -A - C = -18-1 = -$19.0 billionPrice Controls and Natural Gas Shortages
اسلاید 17: Chapter 9Slide 17Measuring the Impact of Price Controls1975 dollars, deadweight loss= -B - C = -0.4 - 1 = -$1.4 billionIn 2000 dollars, the deadweight loss is more than $4 billion per year.Price Controls and Natural Gas Shortages
اسلاید 18: Chapter 9Slide 18The Efficiency of a Competitive MarketWhen do competitive markets generate an inefficient allocation of resources or market failure?1) ExternalitiesCosts or benefits that do not show up as part of the market price (e.g. pollution)
اسلاید 19: Chapter 9Slide 19The Efficiency of a Competitive MarketWhen do competitive markets generate an inefficient allocation of resources or market failure?2)Lack of InformationImperfect information prevents consumers from making utility-maximizing decisions.
اسلاید 20: Chapter 9Slide 20Government intervention in these markets can increase efficiency.Government intervention without a market failure creates inefficiency or deadweight loss.The Efficiency of a Competitive Market
اسلاید 21: Chapter 9Slide 21P1Q1ABCWhen price is regulated to be no higher than P1, the deadweight loss given by triangles B and C results.Welfare Loss When Price Is Held Below Market-Clearing LevelQuantityPriceSDP0Q0
اسلاید 22: Chapter 9Slide 22P2Q3ABCQ2What would the deadweightloss be if QS = Q2?When price is regulated to be no lower than P2 only Q3will be demanded. Thedeadweight loss is givenby triangles B and CWelfare Loss When Price Is Held Above Market-Clearing LevelQuantityPriceSDP0Q0
اسلاید 23: Chapter 9Slide 23The Market for Human KidneysThe 1984 National Organ Transplantation Act prohibits the sale of organs for transplantation.Analyzing the Impact of the ActSupply: QS = 8,000 + 0.2PIf P = $20,000, Q = 12,000Demand: QD = 16,000 - 0.2P
اسلاید 24: Chapter 9Slide 24DRectangles A and D measure the total value of kidneys when supply is constrained.ACThe loss to suppliersis given by rectangle Aand triangle C.The Market for Kidneys, and Effects of the 1984 Organ Transplantation ActQuantityPrice8,0004,0000$10,000$30,000$40,000S’The 1984 act effectivelymakes the price zero.BIf consumers receivedkidneys at no cost, theirgain would be given byrectangle A less triangle B.SD12,000$20,000
اسلاید 25: Chapter 9Slide 25The act limits the quantity supplied (donations) to 8,000.Loss to supplier surplus:A + C = (8,000)($20,000) + (1/2)(4,000)($20,000) = $200/m.The Market for Human Kidneys
اسلاید 26: Chapter 9Slide 26Gain to recipients:A - B =(8,000)($20,000) - (1/2)(4,000)($20,000) = $120/m.Deadweight loss:B + C or$200 million - $120 million = $80 millionThe Market for Human Kidneys
اسلاید 27: Chapter 9Slide 27Other Inefficiency Cost1)Allocation is not necessarily to those who value the kidney’s the most.2)Price may increase to $40,000, the equilibrium price, with hospitals getting the price.The Market for Human Kidneys
اسلاید 28: Chapter 9Slide 28Arguments in favor of prohibiting the sale of organs:1)Imperfect information about donor’s health and screening The Market for Human Kidneys
اسلاید 29: Chapter 9Slide 29Arguments in favor of prohibiting the sale of organs:2)Unfair to allocate according to the ability to payHolding price below equilibrium will create shortagesOrgans versus artificial substitutesThe Market for Human Kidneys
اسلاید 30: Chapter 9Slide 30Minimum PricesPeriodically government policy seeks to raise prices above market-clearing levels.We will investigate this by looking at a price floor and the minimum wage.
اسلاید 31: Chapter 9Slide 31BAThe change in producersurplus will beA - C - D. Producersmay be worse off.CDPrice MinimumQuantityPriceSDP0Q0PminQ3Q2If producers produce Q2, the amount Q2 - Q3will go unsold.
اسلاید 32: Chapter 9Slide 32BThe deadweight lossis given by triangles B and C.CAwminL1L2UnemploymentFirms are not allowed topay less than wmin. Thisresults in unemployment.SDw0L0The Minimum WageLw
اسلاید 33: Chapter 9Slide 33Airline RegulationDuring 1976-1981 the airline industry in the U.S. changed dramatically.Deregulation lead to major changes in the industry.Some airlines merged or went out of business as new airlines entered the industry.
اسلاید 34: Chapter 9Slide 34BACAfter deregulation:Prices fell to PO. Thechange in consumer surplus is A + B.Q3DArea D is the costof unsold output.Effect of Airline Regulation by the Civil Aeronautics BoardQuantityPriceSDP0Q0Q1PminQ2Prior to deregulationprice was at Pmin and QD = Q1 and Qs = Q2.
اسلاید 35: Airline Industry DataNumber of carriers337286608696Passenger load factor(%)545961626769Passenger-mile rate (constant 1995 dollars).218.210.166.150.129.126Real cost index (1995=100)10112211110710099Real cost index corrected for fuel cost increases94989810010098197519801985199019951996
اسلاید 36: Chapter 9Slide 36Airline Industry DataAirline industry data show:1)Long-run adjustment as the number of carriers increased and prices decreased2)Higher load factors indicating more efficiency
اسلاید 37: Chapter 9Slide 37Airline Industry DataAirline industry data show:3)Falling rates4)Real cost increased slightly (adjusted fuel cost)5) Large welfare gain
اسلاید 38: Chapter 9Slide 38Price Supports and Production QuotasMuch of agricultural policy is based on a system of price supports.This is support price is set above the equilibrium price and the government buys the surplus.This is often combined with incentives to reduce or restrict production
اسلاید 39: Chapter 9Slide 39BDATo maintain a price Psthe government buys quantity Qg . The change inconsumer surplus = -A - B,and the change in producer surplus is A + B + DD + QgQgPrice SupportsQuantityPriceSDP0Q0PsQ2Q1
اسلاید 40: Chapter 9Slide 40D + QgQgBAPrice SupportsQuantityPriceSDP0Q0PsQ2Q1The cost to the government is the speckled rectanglePs(Q2-Q1)DTotalWelfareLossTotal welfare lossD-(Q2-Q1)ps
اسلاید 41: Chapter 9Slide 41Price SupportsQuestion:Is there a more efficient way to increase farmer’s income by A + B + D?
اسلاید 42: Chapter 9Slide 42Production QuotasThe government can also cause the price of a good to rise by reducing supply.Price Supports and Production Quotas
اسلاید 43: Chapter 9Slide 43What is the impact of:1)Controlling entry into the taxicab market?2)Controlling the number of liquor licenses?Price Supports and Production Quotas
اسلاید 44: Chapter 9Slide 44BACS reduced by A + BChange in PS = A - CDeadweight loss = BCCDSupply RestrictionsQuantityPriceDP0Q0SPSS’Q1Supply restricted to Q1Supply shifts to S’ @ Q1
اسلاید 45: Chapter 9Slide 45BACDSupply RestrictionsQuantityPriceDP0Q0SPSS’Q1Ps is maintained with and incentiveCost to government = B + C + D
اسلاید 46: Chapter 9Slide 46Supply RestrictionsBAQuantityPriceDP0Q0PSSS’DC = A - C + B + C + D = A + B + D.The change in consumer and producer surplus is the same as with price supports. = -A - B + A + B + D - B - C - D = -B - C.
اسلاید 47: Chapter 9Slide 47Supply RestrictionsQuestions:How could the government reduce the cost and still subsidize the farmer?Which is more costly: supports or acreage limitations?BAQuantityPriceDP0Q0PSSS’DC
اسلاید 48: Chapter 9Slide 48Supporting the Price of Wheat1981Supply: Qs = 1,800 + 240PDemand: QD = 3,550 - 266PEquilibrium price and quantity was $3.46 and 2,630 million bushels
اسلاید 49: Chapter 9Slide 49Supporting the Price of Wheat1981Price support was set at $3.70QD + QG = QDT = 3,440 -266P + QGQS = QD1,800 + 240P = 3,550 - 266P + QGQG = 506P -1,750QG = (506)(3.70) -175=122 million bushels
اسلاید 50: Chapter 9Slide 50D + QgBy buying 122million bushels the governmentincreased the market-clearing price.P0 = $3.702,5662,688ABCQgAB consumer lossABC producer gainSDP0 = $3.462,6301,800The Wheat Market in 1981QuantityPrice
اسلاید 51: Chapter 9Slide 51Supporting the Price of Wheat1981The change in consumer surplus = (-A -B)A = (3.70 - 3.46)(2,566) = $616 millionB = (1/2)(3.70-3.46)(2,630-2,566) = $8 millionChange in consumer surplus: -$624 million.
اسلاید 52: Chapter 9Slide 52Supporting the Price of Wheat1981Cost to the government:$3.70 x 122 million bushels = $452 millionTotal cost = $624 + 452 = $1,076 millionTotal gain = A + B + C = $638 millionGovernment also paid 30 cents/bushel = $806 million
اسلاید 53: Chapter 9Slide 53Supporting the Price of WheatIn 1985, export demand fell and the market clearing price of wheat fell to $1.80/bushel.
اسلاید 54: Chapter 9Slide 54Supporting the Price of Wheat1985 Supply: QS = 1,800 + 240P1986 Demand: QD = 2580 - 194PQS = QD at $1.80 and 2,232 million bushelsPS = $3.20 To maintain $3.20/bushel a production quota of 2,425 bushels was imposed
اسلاید 55: Chapter 9Slide 55Supporting the Price of Wheat1985Government Purchase: 2,425 = 2,580 - 194P + QGQG = -155 + 194PP = $3.20 -- the support priceQG = -155 + 194($3.20) = 466 million bushels
اسلاید 56: Chapter 9Slide 56The Wheat Market in 1985QuantityPrice1,800SDP0 = $1.802,232To increase theprice to $3.20, thegovernment bought 466 million bushelsand imposeda production quotaof 2,425 bushels.D + QSS’P0 = $3.201,9592,425QS
اسلاید 57: Chapter 9Slide 57Supporting the Price of Wheat1985Government Purchase: Government cost = $3.20 x 466 = $1,491million80 cent subsidy = .80 x 2,425 = $1,940 millionTotal cost = $3.5 billion
اسلاید 58: Chapter 9Slide 58Supporting the Price of WheatQuestion:What is the change in consumer and producer surplus?
اسلاید 59: Chapter 9Slide 59Supporting the Price of Wheat1996 Freedom to FarmReduces price supports and quotas until 2003 when they go back into effect under the 1996 law.
اسلاید 60: Chapter 9Slide 60Supporting the Price of Wheat1998 Wheat MarketP = $2.65QD = 3244 - 283PQS = 1944 + 207PQ = 2493Government subsidy of .66/bushel or $1.6 billion
اسلاید 61: Chapter 9Slide 61Import Quotas and TariffsMany countries use import quotas and tariffs to keep the domestic price of a product above world levels
اسلاید 62: Chapter 9Slide 62QSQDPWImportsABC By eliminating imports,the price is increased to PO. The gain is area A. Theloss to consumers A + B + C,so the deadweight loss is B + C.Import Tariff or Quota That Eliminates ImportsQuantityPriceHow high would a tariff haveto be to get the same result?DP0Q0SIn a free market, the domestic price equals the world price PW.
اسلاید 63: Chapter 9Slide 63DCBQSQDQ’SQ’DAP*PwImport Tariff or Quota (general case)QuantityPriceDSThe increase in price can be achieved by a quota or a tariff.Area A is again the gain to domestic producers.The loss to consumers is A + B + C + D.
اسلاید 64: Chapter 9Slide 64Import Tariff or Quota (general case)If a tariff is used the government gains D, so the net domestic product loss is B + C.If a quota is used instead, rectangle D becomes part of the profits of foreign producers, and the net domestic loss is B + C + D.DCBQSQDQ’SQ’DAP*PwQuantityDSPrice
اسلاید 65: Chapter 9Slide 65Question:Would the U.S. be better off or worse off with a quota instead of a tariff? (e.g. Japanese import restrictions in the 1980s)Import Tariff or Quota (general case)DCBQSQDQ’SQ’DAP*PwQuantityDSPrice
اسلاید 66: Chapter 9Slide 66The Sugar QuotaThe world price of sugar has been as low as 4 cents per pound, while in the U.S. the price has been 20-25 cents per pound.
اسلاید 67: Chapter 9Slide 67The Sugar QuotaThe Impact of a Restricted Market (1997)U.S. production = 15.6 billion poundsU.S. consumption = 21.1 billion poundsU.S. price = 22 cents/poundWorld price = 11 cents/pound
اسلاید 68: Chapter 9Slide 68The Sugar QuotaThe Impact of a Restricted MarketU.S. ES = 1.54U.S. ED = -0.3U.S. supply: QS = -7.83+ 1.07PU.S. demand: QD = 27.45 - 0.29PP = .23 and Q = 13.7 billion pounds
اسلاید 69: CDBQS = 4.0Q’S = 15.6Q’d = 21.1Qd = 24.2AThe cost of the quotasto consumers was A + B + C + D, or $2.4b. The gain to producers was area A, or $1b.Sugar Quota in 1997Quantity(billions of pounds)Price(cents/lb.)SUSDUS510152025048111620PW = 11PUS = 21.930
اسلاید 70: CDBQS = 4.0Q’S = 15.6Q’d = 21.1Qd = 24.2ASugar Quota in 1997Quantity(billions of pounds)Price(cents/lb.)SUSDUS510152025048111620PW = 11PUS = 21.930Rectangle D was thegain to foreign producerswho obtained quota allotments, or $600 million.Triangles B and C representthe deadweight loss of $800 million.
اسلاید 71: Chapter 9Slide 71The Impact of a Tax or SubsidyThe burden of a tax (or the benefit of a subsidy) falls partly on the consumer and partly on the producer.We will consider a specific tax which is a tax of a certain amount of money per unit sold.
اسلاید 72: Chapter 9Slide 72DSBDABuyers lose A + B, andsellers lose D + C, and the government earns A + D in revenue. The deadweightloss is B + C.CIncidence of a SpecificTaxQuantityPriceP0Q0Q1PSPbtPb is the price (includingthe tax) paid by buyers.PS is the price sellers receive,net of the tax. The burdenof the tax is split evenly.
اسلاید 73: Chapter 9Slide 73Incidence of a Specific TaxFour conditions that must be satisfied after the tax is in place:1)Quantity sold and Pb must be on the demand line: QD = QD(Pb)2)Quantity sold and PS must be on the supply line: QS = QS(PS)
اسلاید 74: Chapter 9Slide 74Incidence of a Specific TaxFour conditions that must be satisfied after the tax is in place:3)QD = QS 4)Pb - PS = tax
اسلاید 75: Impact of a Tax Depends on Elasticities of Supply and DemandQuantityQuantityPricePriceSDSDQ0P0P0Q0Q1PbPStQ1PbPStBurden on BuyerBurden on Seller
اسلاید 76: Chapter 9Slide 76Pass-through fractionES/(ES - Ed)For example, when demand is perfectly inelastic (Ed = 0), the pass-through fraction is 1, and all the tax is borne by the consumer.The Impact of a Tax or Subsidy
اسلاید 77: Chapter 9Slide 77The Effects of a Tax or SubsidyA subsidy can be analyzed in much the same way as a tax.It can be treated as a negative tax.The seller’s price exceeds the buyer’s price.
اسلاید 78: Chapter 9Slide 78DSSubsidyQuantityPriceP0Q0Q1PSPbsLike a tax, the benefitof a subsidy is splitbetween buyers and sellers, dependingupon the elasticities ofsupply and demand.
اسلاید 79: Chapter 9Slide 79SubsidyWith a subsidy (s), the selling price Pb is below the subsidized price PS so that:s = PS - Pb
اسلاید 80: Chapter 9Slide 80SubsidyThe benefit of the subsidy depends upon Ed /ES.If the ratio is small, most of the benefit accrues to the consumer.If the ratio is large, the producer benefits most.
اسلاید 81: Chapter 9Slide 81A Tax on GasolineMeasuring the Impact of a 50 Cent Gasoline TaxIntermediate-run EP of demand = -0.5QD = 150 - 50PEP of supply = 0.4QS = 60 + 40PQS = QD at $1 and 100 billion gallons per year (bg/yr)
اسلاید 82: Chapter 9Slide 82 A Tax on GasolineWith a 50 cent taxQD = 150 - 50Pb = 60 + 40PS = QS150 - 50(PS+ .50) = 60 + 40PSPS = .72Pb = .5 + PSPb = $1.22
اسلاید 83: Chapter 9Slide 83A Tax on GasolineWith a 50 cent taxQ = 150 -(50)(1.22) = 89 bg/yrQ falls by 11%
اسلاید 84: Chapter 9Slide 84DALost ConsumerSurplusLost ProducerSurplusPS = .72Pb = 1.22Impact of a 50 Cent Gasoline TaxQuantity (billiongallons per year)Price($ pergallon)050150.50100P0 = 1.001.5089t = 0.5011The annual revenue from the tax is .50(89) or $44.5 billion. The buyerpays 22 cents of the tax, andthe producer pays 28 cents.SD60
اسلاید 85: Chapter 9Slide 85DALost ConsumerSurplusLost ProducerSurplusPS = .72Pb = 1.22Impact of a 50 Cent Gasoline TaxPrice($ pergallon)050150.50100P0 = 1.001.5089t = 0.5011SD60Deadweight loss = $2.75 billion/yrQuantity (billiongallons per year)
اسلاید 86: Chapter 9Slide 86SummarySimple models of supply and demand can be used to analyze a wide variety of government policies.In each case, consumer and producer surplus are used to evaluate the gains and losses to consumers and producers.
اسلاید 87: Chapter 9Slide 87SummaryWhen government imposes a tax or subsidy, price usually does not rise or fall by the full amount of the tax or subsidy.Government intervention generally leads to a deadweight loss.
اسلاید 88: Chapter 9Slide 88SummaryGovernment intervention in a competitive market is not always a bad thing.
اسلاید 89: End of Chapter 9The Analysis of Competitive Market
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