Professional Documents
Culture Documents
The Analysis of Competitive Markets
The Analysis of Competitive Markets
Competitive Markets
Topics to be Discussed
Evaluating the Gains and Losses from
Government Policies
The Efficiency of a Competitive Market
Minimum Prices
Price Supports and Production Quotas
Import Quotas and Tariffs
The Impact of a Tax or Subsidy
Consumer Surplus
The demand curve shows the willingness to pay
for all consumers in the market
Consumer surplus can be measured by the
area between the demand curve and the market
price
Consumer surplus measures the total net
benefit to consumers
Producer Surplus
The supply curve shows the amount that a
producer is willing to take for a certain amount
of a good
Producer surplus can be measured by the area
between the supply curve and the market price
Producer surplus measures the total net benefit
to producers
Consumer
Surplus
S
Between 0 and Q0
consumer A receives
a net gain from buying
the product-consumer surplus.
5
Producer
Surplus
3
D
QD
QS
Q0
Between 0 and Q0
producers receive
a net gain from
selling each product-producer surplus.
Quantity
S
Pmin
A
When price is
regulated to be no
lower than Pmin, the
deadweight loss given
by triangles B and C
results.
P0
D
Q1
Q0
Q2
Quantity
S
The loss to producers
is the sum of
rectangle A and
triangle C
B
P0
Pmax
D
Q1
Q0
Q2
Quantity
Price
S
B
P0
Pmax
Q1
Q2
Quantity
S
The gain to consumers is
rectangle A minus triangle
B, and the loss to
producers is rectangle A
plus triangle C.
2.40
B
2.00
C
A
(Pmax)1.00
10
15 18 20
25
30 Quantity (Tcf)
Lack of Information
Imperfect information prevents consumers from making utilitymaximizing decisions
Minimum Wages
Wage is set higher than market clearing wage
Decreased quantity of workers demanded
Those workers hired receive higher wages
Unemployment results, since not everyone
who wants to work at the new wage can
S
wmin
A
A is gain to workers
who find jobs at
higher wage.
B
C
w0
L1
L0
D
L2
AB consumer loss
ABC producer gain
Qg
PS = $3.70
P0 = $3.46
By buying 122
million bushels,
the government
increased the
market-clearing
price.
D
1,800
D + Qg
Quantity
Qg
To increase the
price to $3.20, the
government bought
466 million bushels
and imposed
a production quota
of 2,425 bushels.
PS = $3.20
P0 = $1.80
D
1,800 1,959
2,232 2,425
D + Qg
Quantity
S
Pb price
buyers pay
Tax =
$1.00
Buyers lose A + B
P0
PS price
producers
get
Sellers lose D + C
Government gains A
+ D in tax revenue.
The deadweight
loss is B + C.
D
Q1
Q0
Quantity
Burden on Seller
Price
Price
Pb
t
P0
PS
Pb
P0
t
D
PS
Q1 Q0
Quantity
Q1 Q0
Quantity
Effects of a Subsidy
Price
S
Like a tax, the benefit
of a subsidy is split
between buyers and
sellers, depending
upon the elasticities of
supply and demand.
PS
Subsidy
P0
Pb
D
Q0
Q1
Quantity