Condensed Notes Part 2

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Department
Stern Economics
Course
ECON-UB 1
Professor
All Professors
Semester
Fall

Description
Kevin Jin 1 ECON-UB 1 Pre-Exam 2 Notes • Consumer surplus (in a competitive market) o Total benefit or value that consumers receive beyond what they pay for the good o Area above market clearing price and below demand curve ¿ ¿ ¿ ¿ ¿ ¿ o Q is where Q DP )=Q (PS) and P is where P DQ )=P (QS) ¿ P =P (0) Q max D CS= ∫ (P DQ)−P Q dQ=)¿) ∫ Q DP)dP o 0 P =P (Q ) mkt 1 −1 ¿ ¿  If Q D is linear, CS= (PD(0)−P ∗Q ) 2 o E.g. if a consumer values a good at $9 and is willing to pay up to that amount but suppliers and other consumers price the item at $5 on the market, then the consumer gains $4 in surplus • Producer surplus (in a competitive market) o Total benefit or revenue that producers receive beyond what it costs to produce a good o Area below market clearing price and above supply curve ¿ ¿ ¿ ¿ ¿ ¿ o Q is where Q DP )=Q (PS) and P is where P DQ )=P (QS) Q¿ P =P (0) ¿ ¿ maxS o PS= ∫ (P Q −P (Q)SdQ= ) ∫ Q SP)dP 0 Pmkt (Q ) 1 ¿ −1 ¿  If Q S is linear, PS= (P −P (S)∗Q ) 2 o E.g. if a producer produces a good at a cost of $3 and is willing to sell down to that amount but consumers and other suppliers price the item at $5 on the market, then the producer gains $2 in surplus • Total surplus ¿ ¿ ¿ ¿ ¿ ¿ o Q is where Q DP )=Q (PS) and P is where P DQ )=P (QS) Kevin Jin 2 ECON-UB 1 Pre-Exam 2 Notes Q¿ o TS= ∫ (P DQ)−P (QS dQ) 0 1 −1 −1 ¿  If QS and Q D are linear,TS= 2 (PD(0)−P (S)∗Q ) • Welfare (in a competitive market) o Gains and losses to producers and consumers o Deadweight loss: total loss in producer and consumer surplus  Economic efficiency is when consumer and producer surplus are maximized  All price controls impose an efficiency cost on the economy, i.e. make the market less efficient than a free market o Enforcing a minimum price control or maximum supply restriction raises prices above market clearing levels such that producers benefit  Price control, e.g. minimum wage (and airline regulations, agricultural policies, etc.) • Firms are consumers, workers are producers • Decreases quantity of workers demanded, but those workers who are hired receive higher wages • Causes unemployment because not everyone who wants to work at the new wage can  Supply restrictions, e.g. limited taxi medallions, limited liquor licenses, etc. • Drivers are consumers, government is producer  Deadweight loss is bounded by the supply and demand curves from the quantity supplied at the enforced minimum price to the quantity supplied at the market clearing price  Consumer surplus bounded from q = 0 to the quantity supplied at the enforced minimum price and from the market clearing price to the enforced minimum price is converted to producer surplus o Enforcing a maximum price control lowers prices below clearing levels such that consumers benefit Kevin Jin 3 ECON-UB 1 Pre-Exam 2 Notes  Price control, e.g. rent control  Deadweight loss is bounded by the supply and demand curves from the quantity supplied at the enforced maximum price to the quantity supplied at the market clearing price  Producer surplus bounded from q = 0 to the quantity supplied at the enforced maximum price and from the enforced maximum price to the market clearing price is converted to consumer surplus  With inelastic demand, deadweight loss to consumers can be larger than the producer surplus that is converted to consumer surplus such that consumers suffer net losses from price controls o Enforcing a specific tax (particular amount per unit sold) raises prices above market clearing levels for consumers and lowers prices below market clearing levels for producers  Deadweight loss is bounded by the supply and demand curves from the quantity supplied at the seller’s lowered price (also the quantity demanded at the buyer’s raised price) to the quantity supplied at the market clearing price  Producer surplus bounded from q = 0 to the quantity supplied at the seller’s lowered price (also the quantity demanded at the buyer’s raised price) and from the seller’s lowered price to the market clearing price is given to the government  Consumer surplus bounded from q = 0 to the quantity supplied at the seller’s lowered price (also the quantity demanded at the buyer’s raised price) and from the market clearing price to the buyer’s raised price is given to the government E d<1  If demand is more relatively inelastic than suppl∣E(s ), burden (incidence) is primarily on buyer and less so on seller, e.g. cigarettes E d>1  If supply is more relatively inelastic than deman∣E(s ), burden (incidence) is primarily on seller and less so on buyer  E.g. consider Pb−P =s1 gas tax and price of gas isP 0$2 Q =150−25p Q =60+20p E =−0.5 where d and s . d and Kevin Jin 4 ECON-UB 1 Pre-Exam 2 Notes E s0.4 so burden is expected to be primarily on supplier. Q =Q ⇔150−25p =60+20 p ⇔150−25 p +1 =60+20p(⇔p =$).44∧ p =$2.44 d s b s s s s b Qd=150−25 p =8bbnbarrels . Thus compared to 150−25 p =000bnbarrels without tax, so Q falls by 11% with the p −p =$0.44 tax. Price for consumers increases by b 0 and price for p0−p s$0.56 producers decreases by . Government revenue, (Pb−P ∗s=$1∗89bnbarrels , is $89 billion per year o Enforcing a subsidy (a “negative tax”) lowers prices below market clearing levels for consumers and raises prices above market clearing levels for producers
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