微經(jīng)材料祝好課件micro-chapter910a

1、Chapter 9Market EquilibriumAnnouncementProblem Set 3: Due on Nov 20Topics to be DiscussedMarket equilibriumQuantity tax and equilibriumTax incidence Deadweight loss Market EquilibriumA market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers.Also call

2、ed “market is cleared”Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*q*D(p*) = S(p*); the marketis in equilibrium.Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*S(p)D(p) S(p); an excessof quantit

3、y supplied overquantity demanded.pD(p)Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*S(p)D(p) S(p”); an excessof quantity demandedover quantity supplied.p”S(p”)Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*D(p”)D(p”) S(p”); an excessof quantity demandedover q

4、uantity supplied.p”S(p”)Market price must rise towards p*.Market EquilibriumWe can calculate the market equilibrium price and quantity using D(p)=S(p)Can we calculate the market equilibrium using the inverse market demand and supply curves? Yes, it is the same calculation Pd(q)=Ps(q).Market Equilibr

5、iumthe equation of the inverse marketdemand curve. Andthe equation of the inverse marketsupply curve.Market EquilibriumqD-1(q),S-1(q)D-1(q) = (a-q)/bMarket inversedemandS-1(q) = (-c+q)/dp*q*At equilibrium,D-1(q*) = S-1(q*).Market inverse supplyMarket EquilibriumTwo special cases:quantity supplied is

6、 fixed, independent of the market price, andquantity supplied is extremely sensitive to the market price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqq* = cMarket quantity supplied isfixed, independent of price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqp*D-1(q) = (a-q)/bMarketdemandq* =

7、 cMarket quantity supplied isfixed, independent of price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pq p* =(a-c)/bD-1(q) = (a-q)/bMarketdemandq* = cp* = D-1(q*); that is,p* = (a-c)/b.Market quantity supplied isfixed, independent of price.Market EquilibriumMarket quantity supplied isextremely se

8、nsitive to price.S-1(q) = p*.pqp*Market EquilibriumMarket quantity supplied isextremely sensitive to price.S-1(q) = p*.pqp*D-1(q) = (a-q)/bMarketdemandq*Comparative StaticsShifting demand curves ePrice of other productsShifting supply curvesTechnologyTaxesQuantity TaxesA quantity tax levied at a rat

9、e of $t is a tax of $t paid on each unit traded.If the tax is levied on sellers then it is an excise tax.If the tax is levied on buyers then it is a sales tax.Quantity TaxesWhat is the effect of a quantity tax on a markets equilibrium?How are prices affected?How is the quantity traded affected?Who p

10、ays the tax?How are gains-to-trade altered?Quantity TaxesA tax rate t makes the price paid by buyers, pb, higher by t from the price received by sellers, ps.Quantity TaxesEven with a tax the market must clear.I.e. quantity demanded by buyers at price pb must equal quantity supplied by sellers at pri

11、ce ps.Quantity Taxesanddescribe the markets equilibrium.Notice that these two conditions apply nomatter if the tax is levied on sellers or onbuyers.Hence, a sales tax rate $t has thesame effect as an excise tax rate $t.Quantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*No taxQ

12、uantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*$tAn excise taxraises the marketsupply curve by $tQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An excise taxraises the marketsupply curve by $t,raises the buyersprice and lowers thequantity traded.$

13、tpbqtQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An excise taxraises the marketsupply curve by $t,raises the buyersprice and lowers thequantity traded.$tpbqtAnd sellers receive only ps = pb - t.psQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*

14、No taxQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An sales tax lowersthe market demandcurve by $t$tQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An sales tax lowersthe market demandcurve by $t, lowersthe sellers price andreduces the quantityt

15、raded.$tqtpsQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An sales tax lowersthe market demandcurve by $t, lowersthe sellers price andreduces the quantitytraded.$tpbpbqtpbAnd buyers pay pb = ps + t.psQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*

16、q*A sales tax levied atrate $t has the sameeffects on themarkets equilibriumas does an excise taxlevied at rate $t.$tpbpbqtpbps$tQuantity Taxes & Market EquilibriumWho pays the tax of $t per unit traded?The division of the $t between buyers and sellers is the incidence of the taxThe incidence of a q

17、uantity tax depends upon the own-price elasticities of demand and supplyQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by buyersQuantity Taxes & Market EquilibriumpD(p),

18、S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by sellersQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by buyersTax paid by sellersDeadweight Loss and Own-Price ElasticitiesA quantity tax imposed on a competitive market reduces the quantity traded a

19、nd so reduces gains-to-trade (i.e. the sum of Consumers and Producers Surpluses).The lost total surplus is the taxs deadweight loss, or excess burden.Deadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxPareto EfficiencyAt the market equilibrium q* we have a Pareto

20、efficient e: at q*, the willingness to pay for an extra unit is just equal to the willingness to supply an extra unit at that priceQ* maximizes the social welfare (CS+PS)Deadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxCSDeadweight Loss and Own-Price Elasticitie

21、spD(p), S(p)MarketdemandMarketsupplyp*q*No taxPSDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxCSPSDeadweight Loss and Own-Price Elasticities$tqtCSThe tax reducesboth CS and PSpD(p), S(p)MarketdemandMarketsupplyp*q*pbpsPSDeadweight Loss and Own-Price Elasticit

22、iespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto governmentTaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto governmentTaxDeadweight Loss and Own-Pri

23、ce ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto governmentTaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto government,and lowers total

24、surplus.TaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsDeadweight lossDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsDeadweight loss fallsas market demand es less own-price elastic.Deadweight Loss and Own-Price El

25、asticitiespD(p), S(p)MarketdemandMarketsupplyps= p*$tpbqt = q*Deadweight loss fallsas market demand es less own-price elastic.When eD = 0, the tax causes no deadweight loss.Deadweight Loss and Own-Price ElasticitiesDeadweight loss due to a quantity tax rises as either market demand or market supply

26、es more own-price elastic.If either eD = 0 or eS = 0 then the deadweight loss is zero.pD(p), S(p)p*q*pmaxDABCEFqSPrice controlCS=C-EPS=-C-FDWL=-E-F +waiting in lineqDpD(p), S(p)p*q*pmaxDABCEFqmaxPrice control with rationingCS=C-EPS=-C-FDWL=-E-F +corruptionApplication: Waiting in LineWaiting in line

27、is an alternative (non-market) way of allocating scarce resourcesIs it efficient compared to market mechanism?Suppose there is a championship basketball game and tickets are free but limitedThe tickets will be distributed according to the principle of “ e-first served”Willingness to pay vs. willingn

28、ess to waitWaiting in LineWillingness to wait# of ticketsp*NWhy is it so different?Waiting time is a private cost and provides no benefits to suppliersWaiting time is a pure deadweight lossAllocation by waiting time will leave room for gain from tradeMarket price measures both private cost and socia

29、l benefitMarket mechanism assures that scarce resources are allocated to most-productive usesChapter 10Market Power: Monopoly and MonopsonyTopics to be DiscussedMonopoly and Monopoly PowerSources of Monopoly PowerThe Social Costs of Monopoly PowerMonopsony and Monopsony PowerLimiting Market Power: T

30、he Antitrust LawsChapter 1061Review of Perfect CompetitionP = MC = ACNormal profits or zero economic profits in the long runLarge number of buyers and sellersHomogenous productPerfect informationFirm is a price takerChapter 1062Review of Perfect CompetitionChapter 1063QPMarketDSQ0P0QPIndividual Firm

31、P0D = MR = Pq0LRACLMCMonopolyMonopolyOne seller - many buyersOne product (no good substitutes)Barriers to entryPrice MakerChapter 1064MonopolyThe monopolist is the supply-side of the market and has complete control over the amount offered for saleMonopolist controls price but must consider consumer

32、demandProfits will be maximized at the level of output where marginal revenue equals marginal costChapter 1065Average and Marginal RevenueThe monopolists average revenue, price received per unit sold, is the market demand curveMonopolist also needs to find marginal revenue, change in revenue resulti

33、ng from a unit change in outputMR is generally lower than AR. Why?Chapter 1066Average and Marginal RevenueChapter 1067Output12345670123$ perunit ofoutput4567Average Revenue (Demand)MarginalRevenueMonopolyObservationsTo increase sales the price must fallMR MCPrice is larger than MC by an amount that

34、depends inversely on the elasticity of demandPerfect CompetitionP = MCDemand is perfectly elastic, so P=MCChapter 1079MonopolyIf demand is very elastic, there is little benefit to being a monopolistThe larger the elasticity, the closer to a perfectly competitive marketNotice a monopolist will never

35、produce a quantity in the inelastic portion of demand curveIn inelastic portion, can increase revenue by decreasing quantity and increasing priceChapter 1080Shifts in DemandIn perfect competition, the market supply curve is determined by marginal costFor a monopoly, output is determined by marginal

36、cost and the shape of the demand curveThere is no supply curve for monopolistic marketChapter 1081Shifts in DemandChapter 1082D1MR1MC$/QMR2D2P1 = P2Q1Q2QuantityShift in demand leads to change in quantity but same priceThe Effect of a TaxIn competitive market, a per-unit tax causes price to rise by l

37、ess than tax: burden is shared by producers and consumersUnder monopoly, price can sometimes rise by more than the amount of the taxTo determine the impact of a tax:t = specific taxMC = MC + tChapter 1083Effect of Excise Tax on MonopolistChapter 1084Quantity$/QMCD = ARMRQ0P0MC + taxtIncrease in P: P

38、0 to P1 taxQ1P1Effect of Excise Tax on MonopolistThe amount the price increases with implementation of a tax depends on elasticity of demandPrice may or may not increase by more than the taxIn a competitive market, the price cannot increase by more than taxProfits for monopolist will fall with a tax

39、Chapter 1085The Multi-plant FirmFor some firms, production takes place in more than one plant, each with different costsFirm must determine how to distribute production between both plantsProduction should be split so that the MC in the plants is the sameOutput is chosen where MR=MC. Profit is there

40、fore maximized when MR=MC at each plant.Chapter 1086The Multi-plant FirmWe can show this algebraically:Q1 and C1 is output and cost of production for Plant 1Q2 and C2 is output and cost of production for Plant 2QT = Q1 + Q2 is total outputProfit is then: = P(QT ) QT C1(Q1) C2(Q2)Chapter 1087The Mult

41、i-plant FirmFirm should increase output from each plant until the additional profit from last unit produced at Plant 1 equals 0Chapter 1088The Multi-plant FirmWe can show the same for Plant 2Therefore, we can see that the firm should choose to produce whereMR = MC1 = MC2We can show this graphicallyM

42、R = MCT gives total outputThis point shows the MR for each firmWhere MR crosses MC1 and MC2 shows the output for each firmChapter 1089Production with Two PlantsChapter 1090Quantity$/QD = ARMRMC1MC2MCTMR*Q1Q2QTP*Measuring Monopoly PowerCould measure monopoly power by the extent to which price is grea

43、ter than MC for each firmLerners Index of Monopoly PowerL = (P - MC)/PThe larger the value of L (between 0 and 1) the greater the monopoly powerL is expressed in terms of EdL = (P - MC)/P = -1/EdEd is elasticity of demand for a firm, not the marketChapter 1091Monopoly PowerMonopoly power, however, d

44、oes not guarantee profitsProfit depends on average cost relative to priceOne firm may have more monopoly power but lower profits due to high average costsChapter 1092Rule of Thumb for PricingPricing for any firm with monopoly power: If Ed is large, markup is smallIf Ed is small, markup is largeChapt

45、er 1093Elasticity of Demand and Price MarkupP*MRD$/QQuantityMCQ*P*-MCThe more elastic isdemand, the less themarkup.DMR$/QQuantityMCQ*P*P*-MCMarkup Pricing: Supermarkets & Convenience StoresSupermarketsChapter 1095Markup Pricing: Supermarkets & Convenience StoresConvenience StoresChapter 1096Markup P

46、ricing: Supermarkets & Convenience StoresConvenience stores have more monopoly powerConvenience stores do have higher profits than supermarkets, howeverVolume is far smaller and average fixed costs are largerChapter 1097Sources of Monopoly PowerWhy do some firms have considerable monopoly power, and

47、 others have little or none?Monopoly power is determined by ability to set price higher than marginal costA firms monopoly power, therefore, is determined by the firms elasticity of demandChapter 1098Sources of Monopoly PowerThe less elastic the demand curve, the more monopoly power a firm hasThe fi

48、rms elasticity of demand is determined by:1) Elasticity of market demand2) Number of firms in market3) The interaction among firmsChapter 1099Elasticity of Market DemandWith one firm, their demand curve is market demand curveDegree of monopoly power is determined completely by elasticity of market d

49、emandWith more firms, individual demand may differ from market demandDemand for a firms product is more elastic than the market elasticityChapter 10100Number of FirmsThe monopoly power of a firm falls as the number of firms increases; all else equalMore important are the number of firms with signifi

50、cant market shareMarket is highly concentrated if only a few firms account for most of the salesFirms would like to create barriers to entry to keep new firms out of marketPatent, copyrights, licenses, economies of scaleChapter 10101Interaction Among FirmsIf firms are aggressive in gaining market sh

51、are by, for example, undercutting the other firms, prices may reach close to competitive levelsIf firms collude (violation of antitrust rules), could generate substantial monopoly powerMarkets are dynamic and therefore, so is the concept of monopoly powerChapter 10102The Social Costs of Monopoly Pow

52、erMonopoly power results in higher prices and lower quantitiesHowever, does monopoly power make consumers and producers in the aggregate better or worse off?We can compare producer and consumer surplus when in a competitive market and in a monopolistic marketChapter 10103The Social Costs of Monopoly

53、Perfectly competitive firm will produce where MC = D PC and QCMonopoly produces where MR = MC, getting their price from the demand curve PM and QMThere is a loss in consumer surplus when going from perfect competition to monopolyA deadweight loss is also created with monopolyChapter 10104Deadweight

54、Loss from Monopoly PowerChapter 10105BALost Consumer SurplusBecause of the higher price, consumers lose A+B and producer gains A-C.CQuantityAR=DMRMCQCPCPmQm$/QDeadweight LossThe Social Costs of MonopolySocial cost of monopoly is likely to exceed the deadweight lossRent SeekingFirms may spend to gain

55、 monopoly powerLobbyingAdvertisingBuilding excess capacityChapter 10106The Social Costs of MonopolyThe incentive to engage in monopoly practices is determined by the profit to be gainedThe larger the transfer from consumers to the firm, the larger the social cost of monopolyChapter 10107Government R

56、egulationGovernment can regulate monopoly power through price regulationRecall that in competitive markets, price regulation creates a deadweight lossPrice regulation can eliminate deadweight loss with a monopolyThe effect of the regulation can be shown graphically Chapter 10108Price RegulationChapt

57、er 10109ARMRMCPmQmACP1Q1Marginal revenue curvewhen price is regulatedto be no higher that P1.If price is lowered to PC outputincreases to its maximum QC andthere is no deadweight loss.$/QQuantityP2 = PCQcP3Q3Q3P4Government RegulationNatural MonopolyA firm that can produce the entire output of an ind

58、ustry at a cost lower than what it would be if there were several firmsUsually arises when there are large economies of scaleWe can show that splitting the market into two firms results in higher AC for each firm than when only one firm was producingChapter 10110Regulating the Price of a Natural Mon

59、opolyChapter 10111MCACARMR$/QQuantitySetting the price at Pr giving profits as large as possible without going out of businessQrPrPCQCIf the price were regulate to be Pc,the firm would lose moneyand go out of business. Cant cover average costsPmQmUnregulated, the monopolistwould produce Qm and charg

60、e Pm.Government RegulationRegulation in PracticeIt is very difficult to estimate the firms cost and demand functions because they change with evolving market conditionsAn alternative pricing technique rate-of-return regulation allows the firms to set a maximum price based on the expected rate or ret