Transcript INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #2 Table III-1: The Market for CDs P $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 D Q9070503010 S Q **2060100140180

INTRODUCTION TO
MICROECONOMICS
Graphs and Tables
Part #2
Table III-1: The Market for CDs
P
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
$20.00
D
Q
100
90
80
70
60
50
40
30
20
10
00
S
Q
**
00
20
40
60
80
100
120
140
160
180
Figure III-1.1: Calculating the Elasticity of
Demand for CDs
P
$20.00 a
$18.00
$11.00
$9.00
b
f
g
D
$2.00
$0.00
e
c
Q
0 10
45 55
90 100
Calculate ED for (1) Arc ab, (2) Arc ce, and (3) Arc fg
Figure III-1.2: The Demand Curve and Elasticity
P
$20
ED > 1
ED = 1
$10
ED < 1
50
100
Q
ED > 1 : Elastic Portion of the Demand Curve
ED = 1: Unit Elastic Point on the Demand Curve
ED < 1: Inelastic Portion of the Demand Curve
Figure III-1.3: Calculating the Elasticity of Supply
for CDs
P
S
$8.00
d
$6.00
c
$4.00
b
$2.00 a
0
20
40
60
Arc a to b, ES = 3.0 (Why?)
Arc b to c, ES = ? Arc c to d, ES = ?
Q
Figure III-2: The Relation Between Total
Revenue and Price
P
ED > 1
$20.00 a
b
$18.00
$16.00
ED = 1
h
$10.00
ED < 1
$4.00
$2.00
$0.00
k
e
c
0
10
20
50
80
90 100
Q
Figure III-3.1: The Elasticity of Demand and
the Ease of Substitution
P
$2.25
$2.00
D1
500
1,000
Q = Crest Toothpaste
Q
Figure III-3.2: The Elasticity of Demand and
the Ease of Substitution
P
D0
$6
$2
Q
19K 20K
Q = Gasoline
Figure III-4.1: The Elasticity of Demand
and the Time Horizon
P
DSR
Q
Figure III-4.2: The Elasticity of Demand
and the Time Horizon
P
DLR
Q
Figure III-5.1: Time Horizon as a
Determinant of the Elasticity of Supply
P
SSR
Q
Figure III-5.2: Time Horizon as a
Determinant of the Elasticity of Supply
P
SLR
Q
Table III-6.1: Imposing $20 Tax on Producers
P
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
D
Q 0
1,250
1,200
1,150
1,100
1,050
1,000
950
900
850
800
750
S
Q0
00
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
S
Q
TAX =$20
**
**
00
200
400
600
800
1,000
1,200
1,400
1,600
Table III-6.1(a): Imposing $20 Tax on Producers
P
$80
$82
$84
$86
$88
$90
D
Q 0
950
940
930
920
910
900
S
Q0
1,200
1,240
1,280
1,320
1,360
1,400
S
Q
TAX =$20
800
840
880
920
960
1,000
Figure III-6.1: The Final Burden of a Tax
P
D0
STAX=$20
S0
CB
P1 = $86
P0 = $70
P2 = $66
WL
$40
$20
PB
Q1 = 920 1,000 = Q0 1350
Q
UNDERSTANDING FIGURE III-6.1
•
•
•
•
•
•
•
•
1. Social Welfare Maximum at P0 = $70 and Q0 = 1,000
2. Impose Tax = $20, decrease in Supply
3. New Equilibrium at P1 = $86 and Q1 = 920
4. Consumer Burden = CB = (P1 – P0)Q1 = ($86 -$70)920
= $14,720
5. Producer Burden = PB = (P0 – P2)Q1 = ($70 - $66)920
= $3,680
6. TaxRev = T (QTAX) = ($20) 920 = $18,400 = CB + PB
7. WL = 1/2(80)($20) = $800
8. Note: In this situation the Welfare Losses are small
(why?) and the Tax Revenues are large (why?).
Table III-6.1(a): Imposing $20 Tax on Producers
P
$80
$82*
$84
$86
$88
$90*
D
Q 0
950
940*
930
920
910
900*
S
Q0
1,200
1,240
1,280
1,320
1,360
1,400
S
Q TAX =$20
800
840*
880
920
960
1,000*
Elasticity of Demand Calculation for the Final
Burden of the Tax in Figure III-6.1
ED
Q2  Q1 

Q2  Q1 

P2  P1 
( P2  P1 )
ED
900  940
900  940
$90  $82
40

 1840
$8
($90  $82)
$172
– ED = (5)(172)/1840 = 86/184
Elasticity of Supply Calculation for the Final
Burden of the Tax in Figure III-6.1
E STAX
E
S
TAX
(Q 2
(Q 2

(P2
( P2

 Q1 )
 Q1 )
 P1 )
 P1 )
1,000  840 160
1,000  840  1,840
$90  $82
$8
($90  $82)
$172
• ESTAX = (20)(172)/1,840) = 344/184
• Conclusion: ESTAX > ED. Therefore______.
Table III-6.2: Imposing $20 Tax on Producers
P
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
D
Q 1
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
00
S
Q0
00
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
S
Q
TAX =$20
**
**
00
200
400
600
800
1,000
1,200
1,400
1,600
Figure III-6.2: The Final Burden of a Tax
P
$120
STAX=$20
P1 = $80
P0 = $70
P2 = $60
$40
$20
S0
CB
WL
PB
Q1 = 800 1,000 = Q0
D1
Q
UNDERSTANDING FIGURE III-6.2
•
•
•
•
•
•
•
•
•
1. Social Welfare Maximum at P0 = $70 and Q0 = 1,000
2. Impose Tax = $20, decrease in Supply
3. New Equilibrium at P1 = $80 and Q1 = 800
4. Consumer Burden = CB = (P1 – P0)Q1 = ($80 -$70)800
= $8,000
5. Producer Burden = PB = (P0 – P2)Q1 = ($70 - $60)800
= $8,000
6. TaxRev = T (QTAX) = ($20) 800 = $16,000 = CB + PB
7. WL = 1/2(200)($20) = $2,000
8. Note: In this situation the Welfare Losses are larger
(why?) and the Tax Revenues are smaller (why?).
Table III-6.2: Imposing $20 Tax on Producers
P
$40
$50
$60
$70
$75*
$80
$85*
$90
$100
$110
$120
QD1
1,600
1,400
1,200
1,000
900*
800
700*
600
400
200
00
QS0
400
600
800
1,000
1,100
1,200
1,100
1,400
1,600
1,800
2,000
QSTAX =$20
00
200
400
600
700*
800
900*
1,000
1,200
1,400
1,600
Table III-6.3: Elasticity Rules
Rule
Elasticity
1
When ED > ES
2
When ES > ED
3
When ES = ED
Final Burden of Tax
Figure III-7.4: The Demand for Illegal Drugs
P
D
Q
(a) Popular View
P
P
Q
Q
Compulsive Users
Market Demand
(b) Economists’ View
Q
Casual Users
P
Figure III-7.5: The Effect of Prohibition on the
Market for Drugs in the Short-Run
P
S1
$200
S0
$2
D
10m
12m
S0 = Legal Supply S1 = Illegal Supply
Q
Figure III-7.7: The Legal Market for Drugs
P
S0
$2
D
12m
S0 = Legal Supply
Q
Figure III-7.8: The Illegal Market for Drugs
P
D
D’
S1
$200
S0
$2
10m
12m
S0 = Legal Supply S1 = Illegal Supply
Q
Figure IV-1: The Paper Mill and The Farmer
Paper
Mill
The Paper Mill dumps its waste in
the river and the Farmer downstream
uses the polluted water to irrigate his
fields. The damage to his crops is the
external cost imposed involuntarily on
the farmer.
Question: Why does the Paper
Mill dump its wastes in the
river?
Farmer
River
Table IV-2: Effect of a Negative Externality on
the Market for Paper
P
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
QD
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
00
QSPVT
00
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
QSSOC
**
**
00
200
400
600
800
1,000
1,200
1,400
1,600
Figure IV-2.1 The Effect of a Negative
Externality on the Paper Market
P
SSOC
SPVT
$120
P1 = $80
P0 = $70
$40
D
$20
Q1 = 800 1,000 = Q0
QPAPER
Figure IV-2.2 The Welfare Loss of a
Negative Externality
P
SSOC
SPVT
$120
$90
P1 = $80
P0 = $70
WL
$40
D
$20
Q1 = 800 1,000 = Q0
WL = ½(200)($90 - $70) = $2,000
QPAPER
Figure IV-2.3: Central Planning Hierarchy
•
Politburo
Council of Ministers
GOSPLAN
Output Quotas
Input Information
Industrial Ministries
Output Quotas
Input Information
State-Owned Enterprises (SOEs)
Table IV-3: Illustrating the Coase Theorem
• Assume the following:
– D = Damages to the Farmer’s Crops from the Water Pollution
produced by the Paper Mill
– CPM = Costs to the Paper Mill to Install Pollution Control Equipment
– CF = Costs to the Farmer of Cleaning the Water Used for Irrigation
(Filters, Chemicals)
– D = $20,000 CPM = $50,000 CF = $10,000
Farmer (F)
Paper
Mill
(PM)
Do
Nothing
Clean
the Water
Do
Nothing
(1) F = $30,000
PM = $200,000
(3) F = $50,000
PM = $150,000
Clean
the Water
(2) F = $40,000
PM = $200,000
F = Farmer’s Profits
PM = Paper Mill’s Profits
Figure IV-3: The Four-Good Rectangle
Common
Pool
Goods
Degree of Exclusion
low
high
Private
Goods
high
Degree of
Rivalry
low
Public
Goods
Toll
Goods