Chapter 8 performance and strategy in competitive market
Dec 20, 2015
Competitive Market Efficiency Market Failure Role for Government Subsidy and Tax Policy Tax Incidence and Burden Price Controls Business Profit Rates Market Structure and Profit Rates Competitive Market Strategy
Welfare Economics:
the study of how the allocation of resources affects economic well-being.
Economic welfare:
consumer’ s welfare + producer’s welfare
Consumer surplus:
the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.
how much to value the good
The Demand Schedule and the Demand Curve
Price
0
Demand
1 2 3 4
$100 John’s willingness to pay
80 Paul’s willingness to pay
70 George’s willingness to pay
50 Ringo’s willingness to pay
How the Price Affects Consumer Surplus
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Consumersurplus
Quantity
(a) Consumer Surplus at Price P
Price
0
Demand
P1
Q1
B
A
C
Using the Supply Curve to Measure Producer Surplus
producer surplus
The area below the price and above the supply curve.
Figure How the Price Affects Producer Surplus
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Producersurplus
Quantity
Producer Surplus at Price P
Price
0
Supply
B
A
C
Q1
P1
Consumer Surplus
= Value to buyers – Amount paid by buyers
and
Producer Surplus
= Amount received by sellers – Cost to sellers
Total surplus
= Consumer surplus + Producer surplus
or
Total surplus
= Value to buyers – Cost to sellers
MARKET EFFICIENCY
the property of a resource allocation of maximizing the total surplus received by all members of society.
Figure Consumer and Producer Surplus in the Market Equilibrium
Copyright©2003 Southwestern/Thomson Learning
Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
Figure The Efficiency of the Equilibrium Quantity
Copyright©2003 Southwestern/Thomson Learning
Quantity
Price
0
Supply
Demand
Costto
sellers
Costto
sellers
Valueto
buyers
Valueto
buyers
Value to buyers is greaterthan cost to sellers.
Value to buyers is lessthan cost to sellers.
Equilibriumquantity
Summary
Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it.
Consumer surplus measures the benefit buyers get from participating in a market.
Consumer surplus can be computed by finding the area below the demand curve and above the price.
Summary
Producer surplus equals the amount sellers receive for their goods minus their costs of production.
Producer surplus measures the benefit sellers get from participating in a market.
Producer surplus can be computed by finding the area below the price and above the supply curve.
Summary
An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient.
Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.
Summary
The equilibrium of demand and supply maximizes the sum of consumer and producer surplus.
This is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently.
Markets do not allocate resources efficiently in the presence of market failures.
二 . Deadweight Loss
Any cost suffered by consumers or producers that is not transferred, but simply lost.
一 .Externality
An externality is a cost or a benefit arising from an economic transaction that falls on people who do not participate in the transaction.
Two types of externality:
**Negative externality ( spillover cost):
the adverse effect on the bystander
**Positive externality ( spillover benefit):
the beneficial effect on the bystander
Negative Externalities Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building
Positive Externalities Immunizations Restored historic buildings Research into new technologies firework
?? Do you have any bad habits when you sleep? To grind your teeth\ to talk in your dreams
**Problems with externality:
In either situation, decision makers fail to take account of the external effects of their behavior and lead to inefficiency.
Total surplus can not be maximized.
Externality inefficient
(allocation of resources)
The rule of decision making
The basis of Private decision making: private costs and benefit.
Externality: Social cost= private cost+ external cost Social benefit= private benefit+ external benefit
0Q
D (private value)
S (private cost)
e
Qmarket
1.External cost: social cost >private cost(overallocation of resources)
Qoptimum< Qmarket: too much quantity produced
Cost of pollution
2.External benefit: social benefit>private benefit(underallocation of resources)
Qmarket<Qoptimum: too small quantity produced
Education
Conclusions
The market economy tends to over produce goods or services that have external costs and to under produce goods or services that have external benefits.
So externalities affect the allocation of resources and externalities create inefficiency