Economics 2150A/B Lecture Notes - Lecture 10: Shortage, Deadweight Loss, Competitive Equilibrium
22 Jun 2018
School
Department
Course
Professor
Chapter 10 – Competitive Markets: Applications
Overview
Motivation: Agricultural Price Supports
Deadweight Loss
oA Perfectly Competitive Market Without Intervention Maximizes Total Surplus
Government Intervention – Who Wins and Who Loses?
Examples of Various Government Policies
oExcise Taxes
oPrice Ceiling and Floors
oProduction Quotas
oImport Tariffs
Conclusions
Economic Efficiency
Definition – Economic Efficiency means that the total surplus is maximized
oAll gains from trade (between buyers and suppliers) are exhausted at the efficient point
The Perfectly Competitive Equilibrium Attains Economic Efficiency
Consumer and Producer Surplus
Consumer surplus is the difference between the maximum
amount a consumer is willing to pay for a good and the amount
he must actually pay to purchase the good in the marketplace it
measures how much better off the consumer will be when he
purchases the good.
oThe dark-shaded area under the demand curve, but above
the $10 per hour price the consumer must pay, indicates the consumer surplus for each
additional hour of court time. The consumer will receive a consumer surplus of $64 from
purchasing 8 hours of court time.
Producer surplus is the difference between the amount that a firm actually receives from selling a
good in the marketplace and the minimum amount the firm must receive in order to be willing to
supply the good in the marketplace. Just as consumers surplus provides a measure of the net benefit
enjoyed by price-taking consumers, producer surplus provides a measure of the net benefit enjoyed by
price-taking firms from supplying a product at a given market price
find more resources at oneclass.com
find more resources at oneclass.com
oProducer Surplus for a Shipbuilder – The supply curve
S shows that the firm must receive at least $50 million
per ship in order to be willing to supply one ship. To be
willing to supply two ships, the firm must receive at
least $60 million per ship. To be willing to supply three
ships, the firm must receive at least $70 million per
ship, and to supply four ships, the firm must receive at
least $80 million per ship
oIf the market price of ships is $75 million per ship, the
shipbuilder would supply three ships. The shipbuilder’s
producer surplus is $45 million, the area of the shaded
region between the market price and the supply curve
Surplus Maximization in Competitive Equilibrium
oAt the Perfectly Competitive Equilibrium, (Q*, P*)
Total Surplus is maximized
Consumer’s Surplus at (Q*, P*): ABC
Producer’s Surplus at (Q*, P*): DBC
Total Surplus at (Q*, P*): ADC
Deadweight Loss
Definition – A deadweight loss is a reduction in net economic
benefits resulting from an inefficient allocation of resources
oConsumer’s Surplus at (Q1, Pd): AEF
oProducer’s Surplus at (Q1, Pd): EFGD
oTotal Surplus at (Q1, Pd): AFGD
oDeadweight Loss at (Q1, Pd): GFC
Government Intervention: Winners & Losers
Intervention
Type
Effect on
(domestic)
quantity traded
Effect on
(domestic)
Consumer Surplus
Effect on
(domestic)
Producer Surplus
Effect on
(domestic)
Government
Budget
Is a (domestic)
Deadweight Loss
created?
Excise Tax Falls Falls Falls Positive Yes
Subsidies to
Producers
Rises Rises Rises Negative Yes
Maximum Price
Ceilings for
Producers
Falls;
Excess
Demand
Rise or
Fall
Falls Zero Yes
Minimum Price
Floors for
Producers
Falls;
Excess
Supply
Falls Rise or
Fall
Zero Yes
Production
Quotas
Falls;
Excess
Falls Rise or
Fall
Zero Yes
find more resources at oneclass.com
find more resources at oneclass.com
9
ECON 2150A/B Full Course Notes
Verified Note
9 documents
Document Summary
Deadweight loss: a perfectly competitive market without intervention maximizes total surplus. Examples of various government policies: excise taxes, price ceiling and floors, production quotas, import tariffs. Definition economic efficiency means that the total surplus is maximized: all gains from trade (between buyers and suppliers) are exhausted at the efficient point. The consumer will receive a consumer surplus of from purchasing 8 hours of court time. S shows that the firm must receive at least million per ship in order to be willing to supply one ship. To be willing to supply two ships, the firm must receive at least million per ship. The shipbuilder"s producer surplus is million, the area of the shaded region between the market price and the supply curve. Surplus maximization in competitive equilibrium: at the perfectly competitive equilibrium, (q*, p*) . The incidence, or burden, of a tax is shared by both consumers and producers.
