Chapter 9 The Analysis of Competitive Markets
Chapter 9 The Analysis of Competitive Markets
Topics to be Discussed a Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus a The Efficiency of a Competitive Market ■ Minimum Prices Chapter Slide 2
Chapter 9 Slide 2 Topics to be Discussed ◼ Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus ◼ The Efficiency of a Competitive Market ◼ Minimum Prices
Topics to be Discussed a Price Supports and Production Quotas a Import Quotas and Tariffs a The Impact of a Tax or Subsid Chapter Slide 3
Chapter 9 Slide 3 Topics to be Discussed ◼ Price Supports and Production Quotas ◼ Import Quotas and Tariffs ◼ The Impact of a Tax or Subsidy
Evaluating the gains and Losses from Government Policies--Consumer and Producer Surplus ■ Review Consumer 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 Chapter Slide 4
Chapter 9 Slide 4 Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus ◼ Review ⚫ Consumer 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
Consumer and Producer Surplus Price 10 Consumer Surplu Between O and Q consumers aand B receive a net gain from buying the product consumersurplus Producer Between 0 and Qo Surplus producers receive a net gain fror D selling each product producer surplus Quantity Consumera Consumer B Consumer c
Producer Surplus Between 0 and Q0 producers receive a net gain from selling each product-- producer surplus. Consumer Surplus Consumer and Producer Surplus Quantity 0 Price S D 5 Q0 Consumer C 10 7 Consumer A Consumer B Between 0 and Q0 consumers A and B receive a net gain from buying the product-- consumer surplus
Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus a To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus a Welfare Effects o Gains and losses caused b y government intervention in the market Chapter Slide 6
Chapter 9 Slide 6 ◼ To determine the welfare effect of a governmental policy we can measure the gain or loss in consumer and producer surplus. ◼ Welfare Effects ⚫ Gains and losses caused by government intervention in the market. Evaluating the Gains and Losses from Government Policies--Consumer and Producer Surplus
Change in Consumer and Producer Surplus from Price Controls Suppose the government Price imposes a price ceiling Pmax which is below the ket-clearing price Po Deadweight Loss The gain to consumers is the difference between the rectangle A and the triangle B B 0 A The loss to producers is the sum of rectangle max T A and triangle C. Triangle B and c together measure the deadweight loss. Q Q hapter Quantity Slide 7
Chapter 9 Slide 7 The loss to producers is the sum of rectangle A and triangle C. Triangle B and C together measure the deadweight loss. B A C The gain to consumers is the difference between the rectangle A and the triangle B. Deadweight Loss Change in Consumer and Producer Surplus from Price Controls Quantity Price S D P0 Q0 Pmax Q1 Q2 Suppose the government imposes a price ceiling Pmax which is below the market-clearing price P0
Change in Consumer and Producer Surplus from Price Controls ■○ bservations The total loss is equal to area b+ c o The total change in surplus (A-B)+(-A-C)=-B-C o The deadweight loss is the inefficiency of the price controls or the loss of the producer surplus exceeds the gain from consumer surplus Chapter Slide 8
Chapter 9 Slide 8 ◼ Observations: ⚫ The total loss is equal to area B + C. ⚫ The total change in surplus = (A - B) + (-A - C) = -B - C ⚫ The 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
Change in Consumer and Producer Surplus from Price Controls ○ bservation Consumers can experience a net loss in consumer surplus when the demand is sufficiently inelastic Chapter Slide 9
Chapter 9 Slide 9 ◼ Observation ⚫ Consumers can experience a net loss in consumer surplus when the demand is sufficiently inelastic Change in Consumer and Producer Surplus from Price Controls
Effect of Price Controls When demand is inelastic If demand is sufficiently inelastic, triangle b ca Price D be larger than rectangle A and the consumer suffers a net loss from price controls. Example max Oil price controls and gasoline shortages n1979 Q Q Quantity Chapter Slide 10
Chapter 9 Slide 10 B A Pmax C Q1 If demand is sufficiently inelastic, triangle B can be larger than rectangle A and the consumer suffers a net loss from price controls. Example Oil price controls and gasoline shortages in 1979 S D Effect of Price Controls When Demand Is Inelastic Quantity Price P0 Q2
