© 2005 Pearson Education Canada Inc. 9.1 Chapter 9 Applications of the Competitive Model.

© 2005 Pearson Education Canada Inc.9.1

Chapter 9Chapter 9

Applications of the Applications of the Competitive ModelCompetitive Model


Figure 9.1 The supply and demand modelFigure 9.1 The supply and demand model


Demand and SupplyDemand and Supply

Increases in demand lead to movements Increases in demand lead to movements along the supply curve (given an upward along the supply curve (given an upward sloping supply curve) to an increased sloping supply curve) to an increased equilibrium price and quantity.equilibrium price and quantity.

Increases in supply lead to movements Increases in supply lead to movements along the demand curve (given a along the demand curve (given a downward sloping demand curve) an downward sloping demand curve) an increased equilibrium quantity but a increased equilibrium quantity but a decreased equilibrium price.decreased equilibrium price.


Figure 9.3 Heating cost functionsFigure 9.3 Heating cost functions


Figure 9.4 Optimal heating in identical homesFigure 9.4 Optimal heating in identical homes


Figure 9.5 Optimal heating in different homesFigure 9.5 Optimal heating in different homes


Figure 9.6 The economies of a quotaFigure 9.6 The economies of a quota


From Figure 9.6From Figure 9.6 An effective quota reduces the quantity An effective quota reduces the quantity

supplied and raises the price to consumers.supplied and raises the price to consumers. The quota allows the farmers to earn The quota allows the farmers to earn economic economic

rentrent, (a return above the opportunity cost)., (a return above the opportunity cost). The value of the quota increases the costs of The value of the quota increases the costs of

entering the industry and when a quota is sold entering the industry and when a quota is sold to another farmer, the value is transferred to another farmer, the value is transferred completely to the original farmer. This is called completely to the original farmer. This is called the the transitional gains trap.transitional gains trap.


Figure 9.7 The economies of rent controlFigure 9.7 The economies of rent control


Potential Effects of Rent Control Potential Effects of Rent Control Tenants who occupy apartments when rent Tenants who occupy apartments when rent

control is established will benefit.control is established will benefit. All landlords will be worse off and some will be All landlords will be worse off and some will be

induced to reduce supply.induced to reduce supply. As a result of reduced supply, some renters As a result of reduced supply, some renters

are worse off.are worse off. The way available apartments are allocated The way available apartments are allocated

imposes costs on suppliers and renters and the imposes costs on suppliers and renters and the allocation is not Pareto-optimal.allocation is not Pareto-optimal.


Figure 9.8 The effect of a tax on producersFigure 9.8 The effect of a tax on producers


From Figure 9.8 From Figure 9.8

A per-unit tax increases the equilibrium A per-unit tax increases the equilibrium price by less than the tax.price by less than the tax.

The tax creates a The tax creates a deadweight lossdeadweight loss as it as it reduces consumer and producer surplus.reduces consumer and producer surplus.

The amount of the tax paid by consumers The amount of the tax paid by consumers and producers depends upon the relative and producers depends upon the relative elasticities of demand and supply.elasticities of demand and supply.


Figure 9.9 Elasticity of demand and per-unit taxesFigure 9.9 Elasticity of demand and per-unit taxes


Figure 9.10 The effect of a tax on consumersFigure 9.10 The effect of a tax on consumers


Figure 9.11 The effect of a tariff on shoesFigure 9.11 The effect of a tariff on shoes


Figure 9.12 The market for wivesFigure 9.12 The market for wives


Figure 9.13 The equilibrium amount of crimeFigure 9.13 The equilibrium amount of crime


From Figure 9.13 From Figure 9.13

The demand curve for crime shows the The demand curve for crime shows the declining marginal benefits of a crime as declining marginal benefits of a crime as function of the number of crimes.function of the number of crimes.

The supply curve of crime slopes upwards, The supply curve of crime slopes upwards, showing rising marginal costs. A major cost showing rising marginal costs. A major cost being foregone income from legitimate being foregone income from legitimate employment (persons with low alternative employment (persons with low alternative earnings are the first to turn to crime). earnings are the first to turn to crime).

In equilibrium, the quantity of crime is where In equilibrium, the quantity of crime is where the marginal benefits and marginal costs meet.the marginal benefits and marginal costs meet.


The Economic of CrimeThe Economic of Crime

The model suggests two methods to The model suggests two methods to reduce crime:reduce crime:

1.1. Reduce the net benefits of crime Reduce the net benefits of crime (impose stiffer penalties and (impose stiffer penalties and increase law enforcement).increase law enforcement).

2.2. Raise the opportunity cost (increase Raise the opportunity cost (increase job opportunities and raise social job opportunities and raise social safety nets).safety nets).

© 2005 Pearson Education Canada Inc. 9.1 Chapter 9 Applications of the Competitive Model.

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Transcript of © 2005 Pearson Education Canada Inc. 9.1 Chapter 9 Applications of the Competitive Model.