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Equilibrium

Delve into the concept of market equilibrium and the impact of taxes on supply and demand. Learn about the intricacies of equilibrium price, deadweight loss, and Pareto efficiency. Explore how consumers and producers are affected by taxes in a competitive market.

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Equilibrium

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  1. Equilibrium • Introduce supply • Equilibrium • The effect of taxes • Who really “pays” a tax? • The deadweight loss of a tax • Pareto efficiency

  2. Supply • Assume firms, as consumers, take the market price for the good they are selling as given and outside of their control: the market is competitive • A firm’s supply function measures the quantity of a good that the firm supplies at a given price:

  3. Supply • In general, a firm’s supply increases with the good’s price: • An inverse supply function tells us what the price would have to be to get the producer to supply units of the good:

  4. Net Producer’s Surplus

  5. Changes in Net Producer’s Surplus

  6. Market Supply Curve

  7. Equilibrium • Consider the market for a good where market demand is and market supply is • Equilibrium price is a price such that:

  8. Equilibrium:

  9. Perfectly inelastic supply Perfectly elastic supply Special Cases

  10. Solving for Equilibrium: A Linear Example Suppose that demand and supply functions are linear: for some:

  11. Solving for Equilibrium: A Linear Example • Equilibrium: • Solve this equation for : • Solution:

  12. Demand Shift Supply Shift Comparative Statics

  13. Taxes • Let’s consider the gasoline market one more time • As of today the US government imposes a 15 cents tax per gallon of gasoline • Thus, there will be two prices on the market: price that the supplier gets price that consumer pays

  14. Equilibrium with Taxes • Quantity demanded depends on : • Quantity supplied depends on :

  15. Equilibrium with Taxes • Two equations: in two unknowns: • Combining them:

  16. Equilibrium with Taxes:

  17. Inverse Demand and Supply • Inverse demand function: • Inverse supply function: • Equilibrium:

  18. Equilibrium with Taxes:

  19. Equilibrium with Taxes:

  20. Passing Along a Tax: Consumers Pay the Tax:

  21. Passing Along a Tax: Producers Pay the Tax:

  22. Passing Along a Tax: Consumers Pay Almost All the Tax

  23. Passing Along a Tax: Producers Pay Almost All the Tax

  24. Deadweight Loss of a Tax: B+D

  25. Pareto Efficiency • An economic situation is Pareto efficient when there is no way to make any person better off without hurting anybody else. • Pareto efficiency and income distribution. • Is a competitive marketPareto efficient?

  26. Competitive Market and Pareto Efficiency

  27. Values Taxes • Equilibrium: • Inverse demand and supply:

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