Chapter 8 performance and strategy in competitive market

Competitive Market Efficiency Market Failure Role for Government Subsidy and Tax Policy Tax Incidence and Burden Price Controls Business Profit Rates Market Structure and Profit Rates Competitive Market Strategy

一.Competitive Market Efficiency Why is it called Perfect Competition? Max social welfare

Welfare Economics: the study of how the allocation of resources affects economic well- being. Economic welfare: consumer’ s welfare + producer’s welfare

Consumer surplus: the buyer ’ s willingness to pay for a good minus the amount the buyer actually pays for it. how much to value the good

The Demand Schedule and the Demand Curve Price 0 Demand 1234 $100 John’s willingness to pay 80 Paul’s willingness to pay 70 George’s willingness to pay 50 Ringo’s willingness to pay

(a) Price = $80 Price $100 Demand 1234 Quantity John’s consumer surplus ($20)

The consumer surplus The area below the demand curve and above the price.

How the Price Affects Consumer Surplus Copyright©2003 Southwestern/Thomson Learning Consumer surplus Quantity (a) Consumer Surplus at Price P Price 0 Demand P1P1 Q1Q1 B A C

Producer surplus the amount a seller is paid for a good minus the seller ’ s cost.

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The Supply Schedule and the Supply Curve

Using the Supply Curve to Measure Producer Surplus producer surplus The area below the price and above the supply curve.

Figure How the Price Affects Producer Surplus Copyright©2003 Southwestern/Thomson Learning Producer surplus Quantity Producer Surplus at Price P Price 0 Supply B A C Q1Q1 P1P1

Consumer Surplus = Value to buyers – Amount paid by buyers and Producer Surplus = Amount received by sellers – Cost to sellers

Total surplus = Consumer surplus + Producer surplus or Total surplus = Value to buyers – Cost to sellers

MARKET EFFICIENCY the property of a resource allocation of maximizing the total surplus received by all members of society.

Figure Consumer and Producer Surplus in the Market Equilibrium Copyright©2003 Southwestern/Thomson Learning Producer surplus Consumer surplus Price 0 Quantity Equilibrium price Equilibrium quantity Supply Demand A C B D E

Figure The Efficiency of the Equilibrium Quantity Copyright©2003 Southwestern/Thomson Learning Quantity Price 0 Supply Demand Cost to sellers Cost to sellers Value to buyers Value to buyers Value to buyers is greater than cost to sellers. Value to buyers is less than cost to sellers. Equilibrium quantity

Summary Consumer surplus equals buyers ’ willingness to pay for a good minus the amount they actually pay for it. Consumer surplus measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above the price.

Summary Producer surplus equals the amount sellers receive for their goods minus their costs of production. Producer surplus measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.

Summary An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient. Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.

Summary The equilibrium of demand and supply maximizes the sum of consumer and producer surplus. This is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently. Markets do not allocate resources efficiently in the presence of market failures.

二. Deadweight Loss Any cost suffered by consumers or producers that is not transferred, but simply lost.

Market Failure:

一.Externality An externality is a cost or a benefit arising from an economic transaction that falls on people who do not participate in the transaction. Two types of externality: **Negative externality ( spillover cost): the adverse effect on the bystander **Positive externality ( spillover benefit): the beneficial effect on the bystander

Negative Externalities  Automobile exhaust Cigarette smoking  Barking  dogs (loud pets)  Loud stereos in an apartment building

Positive Externalities  Immunizations  Restored historic buildings  Research into new technologies  firework

?? Do you have any bad habits when you sleep? To grind your teeth\ to talk in your dreams **Problems with externality: In either situation, decision makers fail to take account of the external effects of their behavior and lead to inefficiency. Total surplus can not be maximized. Externality inefficient (allocation of resources)

The rule of decision making The basis of Private decision making: private costs and benefit. Externality: Social cost= private cost+ external cost Social benefit= private benefit+ external benefit 0 Q D (private value) S (private cost) e Qmarket

1.External cost: social cost >private cost (overallocation of resources) Q optimum< Q market: too much quantity produced Cost of pollution

2.External benefit: social benefit>private benefit ( underallocation of resources) Q market< Q optimum: too small quantity produced Education

Conclusions The market economy tends to over produce goods or services that have external costs and to under produce goods or services that have external benefits. So externalities affect the allocation of resources and externalities create inefficiency

Price Controls Price Floors Price floors→ surplus production. Aim:special interest groups

Price Ceilings  Price ceilings →cause shortages.  To make housing more affordable.

PQTRARMREd To fill in the blanks; to draw demand, MR, AR and TR curve

Your Boss during recession...

Be good, OK....

After a week … Please, put more effort in your work......

After a month …. I SAID “MORE EFFORT” !!!!

After a quarterly report … Did you hear me? More effort!!!