Chapters 10: Using the Competitive Model

1. Chapters 10: Using the Competitive Model

2. Efficiency of Competitive Equilibrium • Competitive markets result in allocativeefficiency - a condition in which all possible gains from exchange are realized • Competitive equilibrium leaves no room for mutually beneficial exchange • Consumers would certainly pay less than equilibrium price, but no producer would sell for less • Producers would certainly accept more than equilibrium price, but no consumer would pay more • The cost to produce the last unit of output (the MP of the last unit) equals the price paid

3. Producer Surplus for the Firm Alternative Measures of Producer Surplus MC MC P* Producer Surplus I Producer Surplus II AVC Q* Q*

4. Aggregate Producer Surplus P* Producer Surplus D

5. Total Surplus Price S Consumer Surplus P* Producer Surplus D Q* Quantity

6. Loss of Surplus Due to Market Interventions S Consumer Surplus Consumer Surplus Consumer Surplus Loss Loss Loss Producer Surplus Producer Surplus P Producer Surplus D Price Ceiling Tax Fixed Supply

7. Adjustments in the Long Run P P P1 Profit P2 Profit P3 Zero profit D Qi Q

8. Burden of Taxation Dollars per unit Dollars per unit LS’ + T LS’ LS + T LS LS + T $1.45 $1.40 $1.30 $1.30 A A $1.25 LS $1.25 $1.20 D $1.10 D D’ $1.10 Q2 Q1 Output Q’2 Q2 Q1 Output 0 Q’2 0

9. Deadweight Loss of an Excise Tax R1 + R2 = Transfer of consumer and producer surplus to government tax revenue. Dollars per unit X + Y = Deadweight loss LS + T LS B P1 R1 E X P Y R2 P2 C D Q1 Output Q2 0