Chapter 9 Applications of the Competitive Model

1. Chapter 9Applications of the Competitive Model

2. Figure 9.1 The supply and demand model

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

4. Figure 9.3 Heating cost functions

5. Figure 9.4 Optimal heating in identical homes

6. Figure 9.5 Optimal heating in different homes

7. Figure 9.6 The economics of a quota

8. From Figure 9.6 • An effective quota reduces the quantity supplied and raises the price to consumers. • The quota allows the farmers to earn economic rent, (a return above the opportunity cost). • The value of the quota increases the costs of entering the industry and when a quota is sold to another farmer, the value is transferred completely to the original farmer. This is called the transitional gains trap.

9. Figure 9.7 The economics of rent control

10. Potential Effects of Rent Control • Tenants who occupy apartments when rent control is established will benefit. • All landlords will be worse off and some will be induced to reduce supply. • As a result of reduced supply, some renters are worse off. • The way available apartments are allocated imposes costs on suppliers and renters and the allocation is not Pareto-optimal.

11. Figure 9.8 The effect of a tax on producers

12. From Figure 9.8 • A per-unit tax increases the equilibrium price by less than the tax. • The tax creates a deadweight loss as it reduces consumer and producer surplus. • The amount of the tax paid by consumers and producers depends upon the relative elasticities of demand and supply.

13. Figure 9.9 Elasticity of demand and per-unit taxes

14. Figure 9.10 The effect of a tax on consumers

15. Figure 9.11 The effect of a tariff on shoes

16. Figure 9.12 The market for wives

17. Figure 9.13 The equilibrium amount of crime

18. From Figure 9.13 • The demand curve for crime shows the declining marginal benefits of a crime as function of the number of crimes. • The supply curve of crime slopes upwards, showing rising marginal costs. A major cost being foregone income from legitimate employment (persons with low alternative earnings are the first to turn to crime). • In equilibrium, the quantity of crime is where the marginal benefits and marginal costs meet.

19. The Economic of Crime • The model suggests two methods to reduce crime: • Reduce the net benefits of crime (impose stiffer penalties and increase law enforcement). • Raise the opportunity cost (increase job opportunities and raise social safety nets).