Friday Econ

The order of a long-run average total cost curve for a perfectly competitive firm is

Economies of scale, constant returns to scale, and diseconomies of scale.

Why would Sellers increase their quantity Supplied? (7.4)

Example: A hurricane looming and market for bottled water This results in an Outward Shift of the Demand for Bottled Water.

Given the long-run adjustment process that takes place after a supply or demand shock, we know that the industry supply curve must be

HORIZONTAL, since the supply curve shifts until price is back to its original level and profits are back to zero.

Suppose there is a product being sold in a perfectly competitive market. If the market price of the product rises, producer surplus will

INCREASE since this change results in a higher price, which means there is MORE area between the supply curve and market price for the good.

Exiting shifts the supply curve

LEFT, equilibrium goes UP.

MR equals

MC (MR=MC rule)

The order of curves in a perfectly competitive market

Marginal Cost or M.C. is the top line, Average Total Cost or A.T.C. is in the middle, and Marginal Revenue or M.R. is at the bottom.

Taxation: Tax Incidence and Elasticity Is the tax incidence always split 50/50? (10.2)

No, because Tax Incidence when Supply is More Elastic than Demand.

Compared to the market for electric drills, the market for vintage buttons has fewer buyers and sellers. Social surplus is likely to be higher in the market for drills than in the vintage button market. Is it correct to assume that the outcome oin the drills market is Pareto efficient while in the vintage button market is not? Explain.

No, market size has no bearing on the attainment of Pareto efficiency.

Formula for Profit

P minus ATC times Q = Profit (P-ATC) * Q

Pareto efficiency (7.1)

Pareto efficiency When no one can be made better off without making someone else worse off.

To calculate the Price elasticity of supply

Percentage change in Quantity supplied is divided by Percentage change in price. (% change in Quantity / % change in price)

Price Controls: (10.2)

Price Ceilings and Price Floors

Deadweight loss results from (7.4)

Price Controls.

A Tax imposed on Consumers (10.2)

Step 1: find the new equilibrium after Tax Step 2: find the Eq Quantity after tax Step 3: from that Quantity go up to meet the old Demand curve, that's where the Consumer's effective Price is. Step 4: from that Quantity go up to meet the old Supply curve, that's where the Producer's effective Price is.

A Tax imposed on Producers (10.2)

Step 1: find the new equilibrium after Tax Step 2: find the Eq Quantity after tax Step 3: from the Eq Quantity go up to meet the old Demand curve, that's where the Consumer's effective Price is. Step 4: from the Eq Quantity go up to meet the old Supply curve, that's where the Producer's effective Price is.

Taxation: Tax Incidence and Elasticity Is the tax incidence always split 50/50? (10.2)

Tax Incidence when Demand is More Elastic than Supply.

When a product is indivisible, like a video game, its quantity demanded or supplied can only take integer values.

The D and S curves are thus stair-like with HORIZONTAL jumps from one integer quantity to another.

Efficiency or welfare Impact of a Tax (10.2)

The outcome - output, burden, tax reveneue, DWL - is exactly identical as the situation with $2 tax on Producers!!!!

The markey for economics textbooks is in equilibrium. The government decides to RELAX export restrictions on paper, leading to an increase in the demand for paper. How does social surplus in the market for textbooks change? Why?

The social surplus decreases because the supply of textbooks shifts LEFTWARD, decreasing both consumer and producer surplus.

Calculating the Social surplus (7.1)

The sum of consumer surplus and producer surplus

Are all efficient outcomes also equitable? Explain.

There is really no definitive answer to this question sonce issues surrounding efficiency and equity are the domain of normative economics, where subjective value judgments are made.

If firms in a perfectly competitive market are earning profits or incurring losses in the short run, then in the long run these profits or losses will either cause new firms to enter or existing firms to leave the market.

This will result in a shift in the INDUSTRY SUPPLY CURVE until profits are ZERO.

Social surplus is also known as (7.1)

Total Surplus which is a measure of Efficiency of the Market.

The long run average total cost curve is

U-shaped and is found by using the minimum point across all possible A.T.C. curves for a given quantity.

An example of Pareto efficiency is (7.1)

When price was set at $20, consumers were made better off, but producers were made worse off.

Unit elastic

a 1 percent change in price leads to a 1 percent change in quantity supplied. The unit-elastic is a curved slope.

Perfectly elastic

a very small change in price leads to an infinite change in quantity supplied. The perfectly elastic line is horizontal.

Social surplus is found by

adding Consumer surplus and Producer surplus. (C.S + P.S. = S.S.)

Tax creates a WEDGE between the effective price that producers receive (10.2)

and the effective price that the consumers pay.

Elastic supply

any given percentage change in price leads to a larger percentage change in quantity supplied.

Price controls (10.2)

are attempts by the government to control the price of an activity.

Prices (7.4)

are the key to the invisible hand.

Unelastic

change in price causes a smaller percentage change in quantity supplied.

Under perfect competition (7.1)

consumers and producers maximize their surplus.

Producer surplus is the

difference between the price and the sellers' reservation values.

The long run firms can

enter or exit the industry in response to changes in profitability.

The price elasticity of supply will tend to be positive because as price increases,

firms tend to increase their quantity supplied.

The long-run supply curve is

horizontal at the long-run minimum average total cost level.

Marginal revenue is a

horizontal line.

Price ceiling (10.2)

is a cap (or maximum) on the price.

Price floor (10.2)

is a lower bound (or minimum) on the price.

An effect of a Price Floor (10.2)

is seen as a higher Price above the equilibrium on a graph.

An effect of a Price Ceiling (10.2)

is seen as a higher Price below the equilibrium on a graph.

The size of the SHIFT (10.2)

is the amount of the TAX measured VERTICALLY.

Deadweight Loss (7.4)

is the reduction in social surplus resulting from a market intervention.

Perfectly inelastic

is zero (O) percent increase in quantity supplied. The perfectly inelastic line is vertical.

Exit from an industry causes the supply curve to shift

left.

New entry shifts the market supply to the

left.

In the short run the supply curve is the

marginal cost curve above the AVC and above the ATC curve in the long run.

In a competitive market equilibrium, the allocation of the social surplus is such that

no individual can be made better off without making someone else worse off.

When the market for electric drills is in equilibrium,

no one participant can be made better off without someone else being harmed. This is the essence of the Pareto efficiency.

The firm's supply curve relates

output to prices.

A firm should shut down if

price is less than AVC.

Price controls act to

restrict efficiency.

Tax on Consumers (10.2)

suppresses their demand at any price level and thus DECREASES DEMAND - Shift Left/Down.

For a firm, constant returns to scale occur when

the A.T.C. for the firm does not change as the quantity produced increases.

The STEEPER the demand curve (7 practice)

the LARGER the social surplus in a market.

The STEEPER the supply curve (7 practice)

the LARGER the social surplus in a market.

The FLATTER the demand curve

the SMALLER the social surplus in a market.

The FLATTER the supply curve (7 practice)

the SMALLER the social surplus in a market.

Producer surplus is measured by

the area above the supply curve and under the equilibrium price line.

Consumer surplus is measured by

the area under the demand curve and above equilibrium price line.

Producer surplus is

the difference between the PRICE CONSUMERS PAY and the SUPPLY CURVE.

The Invisible Hand leads to (7.1)

the highest level of social welfare or Efficiency.

For social surplus to be maximized,

the highest-value buyers must transact with the lowest-cost sellers. In this way, buyers and sellers as distinct groups are doing as well as they possibly can.

The difference between the short and long run is that

the long run has the ability to change both labor and physical capital.

Price elasticity of supply is

the measure of how responsive quantity supplied is to price changes.

Downward shift of the marginal revenue curve causes

the new Marginal revenue production to decrease.

Upward shift of the marginal revenue curve causes

the new Marginal revenue production to increase.

If a trade agreement yields zero (0)

they are not doing as well as they possibly can and are doing as poorly as they can while still agreeing to transact.

Shut down is a short-run decision

to not produce anything during a specific period.

Short-run supply curve is

upward sloping.

C.S. after tax: (10.2)

use the consumer effective price. Use the old S and D curves.

P.S. after tax: (10.2)

use the producer effective price. Use the old S and D curves.

There is free entry into an idustry

when entry is unfettered by any special legal or technical barriers.

Increases for demand for a good, which is produced by a competitive industry

will raise the short-run market price.

The price at which a seller is indifferent between making a sale and not doing so is known as his

willingness-to-sell value and reservation price.

Firms continue to produce in the long run when profits are zero because

the opportunity cost of owners' time and any other assets that the owners contribute are included in the firms' cost calculations.

Even if some of the buyers in this market are now willing to pay more than they did earlier, as long as the market equilibrium holds,

the outcome is still Pareto efficient. The only real change is that the level of social surplus might now be higher.

In the long run, the supply curve for a perfectly competitive firm is represented by

the portion of the marginal cost curve above average total cost.

The sort run supply curve for a perfectly competitive firm is represented by

the portion of the marginal cost curve above average variable cost.

Social surplus is simply

the sum of Consumer surplus and Producer surplus. (C.S + P.S. = S.S.)

Social surplus is

the sum of consumer and producer surplus. It is the area that lies between the demand and supply curves from 0 to the equilibrium quantity.

In assessing the performance of a perfectly competitive market, we can say that

- price efficiency allocates goods and services to buyers and sellers. - no individual can be made better off without making someone else worse off. -any departure from the equilibrium necessarily reduces social surplus.

Equity (7.5)

- Addresses the issue of a "fair" distribution of resources across society. - Markets don't necessarily result in outcomes that we, as a society, would consider to be fair.

Equity vs. efficiency (10.2)

- Allocating Increasing resources fairly - Social surplus

Efficiency or welfare Impact of a Tax - A $2 Tax on Consumers (10.2)

- C.S. after tax: use the consumer effective price - P.S. after tax: use the producer effective price - Use the old S and D curves.

Necessary conditions for a long run equilibrium under perfect competition

- No firm has an incentive to exit the market. - each firm is maximizing prioft.....................

Government Failures - Government intervention in markets can cause: (10.2)

1. Deadweight losses 2. Increased costs due to bureaucracy 3. Corruption 4. Black markets

Regulation - Two main types of regulation: (10.2)

1. Quantity control (Direct regulation ) 2. Price controls

Consumer surplus is found using

1/2 times base of triangle times height of triangle (1/2 x B X H= C.S.)

Removing a subsidy can be analyzed as an increase in production costs, the reverse of imposing a subsidy.

After removing a subsidy, economists prdict short-run LOSSES for existing firms, thus firms will EXIT the industry. Production levels will be LOWER in the long run, while long run profits will be UNAFFECTED.

Tax incidence (Tax burden) - Who bears the burden of a tax? (10.2)

Both consumers and producers, even though the tax is officially collected only from one of them.

What if we control the price fixed at its old level? Would sellers have incentive to increase the quantity supplied?

Price controls act to Efficiency restrict efficiency.

Incidence on Consumers:

Consumers' effective price - Before tax Eq price

A perfectly competitive firm will choose to shut down when

Price, which is Marginal Revenue - M.R. intersects the Marginal Cost Curve below the AVERAGE VARIABLE COST CURVE which is A.V.C.

Incidence on Producers: (10.2)

Producers' effective price - Before tax Eq price

Tax on Producers acts like additional production cost at any price level and thus (10.2)

DECREASES SUPPLY - SHIFT LEFT/UP.

When some sellers exit a competitive market, the equilibrium price

INCREASES, and the equilibrium quantity DECREASES.

In the long-run factors that are NOT fixed include

Technology, Capital, and Labor.

Consumer surplus is the

difference between the buyers' reservation values and what the buyers actually pay.

A market in competitive equilibrium

maximizes Social Surplus.