The Analysis of Competitive Markets

1
Chapter 9

• The Analysis of Competitive Markets

2
Consumer and Producer Surplus
Price
Between 0 and Q0 consumer A receives a net gain
from buying the product-- consumer surplus
Between 0 and Q0 producers receive a net gain
from selling each product-- producer surplus.
Total revenue
Variable cost
Q0
QS
QD
Quantity
3
Price Control and Surplus Changes
Price
Consumers that can buy the good gain A transfer
from PS
Consumers that cannot buy, lose B
Original CS
The loss to producers is the sum of rectangle A
and triangle C.
Triangles B and C are losses to society dead
weight loss
Quantity
4
Price Control and Surplus Changes
Price
When price is regulated to be no lower than
Pmin, the deadweight loss given by triangles B
and C results.
Quantity
5
Minimum Prices
Price
If producers produce Q2, the amount Q2 - Q3 will
go unsold.
B
A
D measures total cost of increased production not
sold
The change in producer surplus will be A - C -
D. Producers may be worse off.
Quantity
6
Price Supports
Price
To maintain a price Ps the government buys
quantity Qg .
B
A
Net Loss to society is E B
Quantity
7
Supply Restrictions
Price
B
A

• Supply restricted to Q1
• Supply shifts to S _at_ Q1

• CS reduced by A B
• Change in PS A - C
• Deadweight loss BC

Quantity
8
Incidence of a Specific Tax
Price

• Buyers lose A B

B
A

• Sellers lose D C

• Government gains A D in tax revenue.

D

• The deadweight
• loss is B C.

Quantity
9
Impact of Elasticities on Tax Burdens
Burden on Buyer
Burden on Seller
Price
Price
Quantity
Quantity
10
Import Tariff (general case)

• The increase in price can be achieved by a
  tariff.
• QS increases and QD decreases
• Area A is the gain to domestic producers.
• The loss to consumers is A B C D.
• DWL B C
• Government Revenue is D tariff imports

11
The Impact of a Tax or Subsidy

• We can calculate the percentage of a tax borne by
  consumers using pass-through fraction
• ES/(ES - Ed)
• Tells fraction of tax passed through to
  consumers through higher prices

12
Who bears the burden of an excise tax?