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MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc....
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Transcript of MICROECONOMICS: Theory & Applications By Edgar K. Browning & Mark A. Zupan John Wiley & Sons, Inc....
MICROECONOMICS: Theory &
Applications
By Edgar K. Browning & Mark A. ZupanJohn Wiley & Sons, Inc.10th Edition, Copyright 2009PowerPoint prepared by Della L. Sue, Marist College
Chapter 10: Using the Competitive Model
Copyright 2009 John Wiley & Sons, Inc. 2
Learning Objectives
Show how changes in market conditions or government policies affect the welfare of consumers, producers, and market participants as a whole.
Analyze the effects of an excise tax on a specific good on the welfare of consumers, producers, and market participants as a whole.
Detail how regulation of the U.S. airline industry affected fares, airline company profits, and service quality.
(continued)
Copyright 2009 John Wiley & Sons, Inc. 3
Learning Objectives (continued)
Explain how the entry restrictions imposed by most major U.S. cities on taxis affects fares and the profits earned by licensed taxi owners.
Understand the effects of international trade on consumer and producer surplus and why a net gain results to a country from either imports or exports.
Explore how government-specified maximum quantities, or quotas, on sugar imports affect consumers, domestic producers, and the net welfare of the United States as well as other countries that produce sugar.
Copyright 2009 John Wiley & Sons, Inc. 4
The Evaluation of Gains and Losses
Consumer surplus – a measure of the net gain to a consumer or group of consumers from purchasing a good arising from cost being below the maximum that consumers are willing to pay
Producer surplus – gains to producers from the sale of output to consumers, arising from price exceeding the minimum necessary to compensate the seller.
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Producer Surplus [Figure 10.1]
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Consumer Surplus, Producer Surplus, and Efficient Output
Total surplus – the sum of producer and consumer surplus
Efficiency in output – the condition in which output is expanded to the point where marginal benefit equals marginal cost
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Competition Maximizes Total Surplus [Figure 10.2]
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The Deadweight Loss of a Price Ceiling
Deadweight loss – also called welfare cost, a measure of the aggregate loss in well-being of participants in a market resulting from an inefficient output level
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A Price Ceiling Reduces Total Surplus [Figure 10.3]
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Excise Taxation
Excise tax – a tax levied on a specific goodPer unit tax: does not depend on the market
priceAd valorem tax: an excise tax that is levied
as a certain percentage of the market price
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Effects of a Per-Unit Excise Tax [Figure 10.4]
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The Consequences of an Excise Tax
Short-Run EffectsFirms reduce output.Market price rises.
Long-Run EffectsEven when the tax is levied on and
collected from firms, consumers bear a cost as a result of the higher price.
After the long-run adjustment to the tax, firms make zero economic profits.
Copyright 2009 John Wiley & Sons, Inc. 13
How Elasticities Affect the Tax Burden [Figure 10.5]
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Who Bears the Burden of the Tax?
When an excise tax is imposed on a good, elasticity determines how much output falls and how much the price to consumers rises.
For a given demand curve and tax per unit, the more inelastic the supply curve:
the smaller is the tax burden on consumers the larger is the tax burden on producers the smaller is the output reduction
For a given supply curve and tax per unit, the more inelastic the demand curve:
the greater is the tax burden on consumers the smaller is the tax burden on producers the smaller is the reduction in output
Copyright 2009 John Wiley & Sons, Inc. 15
When the Consumer Bears the Entire Burden of the Tax Situations of extreme elasticity:
If the demand is perfectly inelastic, the demand curve is vertical.
If the supply curve is perfectly elastic, the supply curve is horizontal, which is the constant-cost case.
In both cases, the price to consumers rises by the
amount of the tax.
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The Deadweight Loss of Excise Taxation
Excess burden – another name for the deadweight loss produced by a tax
Figure 10.6
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The Deadweight Loss of Rent Control [Figure 10.7]
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Airline Regulation and Deregulation
1938-1978: period of regulation in the airline industry by the Civil Aeronautics Board (CAB)
Factors that were regulated: Fares Routes between 2 cities Entry of new firms into the industry
Support for deregulation: Fares were set above the market equilibrium fare. Accounting profits for the airline industry were below
the national average for all industries over the 20 years prior to deregulation in 1978.
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Airline Profitability Under CAB Regulation [Figure 10.8]
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The Airline Industry After Deregulation
Since the domestic airline industry was deregulated, several changes have occurred: The cost of air travel to consumers has fallen. A major restructuring of the industry has taken
place. New entrants into the industry have been able to
operate at lower costs than the established carriers.
Air service to small communities has increased but fares have also gone up.
Copyright 2009 John Wiley & Sons, Inc. 21
The Contestability of Airline Markets
Contestable markets – markets in which competition is so perfect that the market price is independent of the number of firms currently serving a market, because the mere possibility of entry suffices to discipline the actions of incumbent suppliers.
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Results of Airline Deregulation
Concerns after deregulation:Greater congestion at airports Issues of airline safety
Possible solutions:Re-regulationExpand airport capacity Implement peak-load pricing
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City Taxicab Markets
Medallion – a city-issued taxi license; fixed supply
Results include higher fares and lower output than under unregulated conditions
Illegal markets in transportation services develop
Figure 10.9
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Consumer and Producer Surplus, and the Net Gains from Trade [Figure 10.10]
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The Gains from International Trade
[Figure 10.11]
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The Link Between Imports and Exports
Both nations are better off from trading. When nations trade, one country’s imports are
the other country’s exports. When the U.S. imports goods from the rest of
the world, the dollars used to pay international suppliers for those goods come back to the U.S. economy in the form of international demand for U.S. exports.
Copyright 2009 John Wiley & Sons, Inc. 27
Government Intervention in Markets: Quantity Controls
Quotas – government-imposed maximum quantities of goods
Application: sugar import quota in the United States
Effect of quotas: Deadweight loss occurs Markets of related products are affected Price differentials between countries arise in
the regulated market
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The Sugar Import Quota [Figure 10.12]
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Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.