1 Announcements--Tuesday Read “Analysis of Competitive Markets” in your readings packet For Discussion Sections, read the Nucor articles Decide which.

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Presentation transcript:

1 Announcements--Tuesday Read “Analysis of Competitive Markets” in your readings packet For Discussion Sections, read the Nucor articles Decide which two cases are the ones for which you would like to do writeups At the end of class, drop your notecard with name, major, career goal, in the box near the door.

2 Announcements--Thursday Read “A Manager's Guide to Government in the Marketplace,” in your readings packet At the end of class, drop your notecard with name, major, career goal, in the box near the door.

3 Week 2: The Invisible Hand

4 Exxon-Mobil Number 2 in the Fortune ,000 gas stations in world 15% of world gasoline demand

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6 What you will learn today How to explain to someone the benefits of a free market economy

7 What good are free markets? Free markets ____________________ They keep _______________________ They make sure __________________ ______________________________ maximize social surplus whoever values a good costs low and quality up the most is the one who gets it

8 The Invisible Hand Adam Smith,__________ ______________________ The invisible hand ______ ______________________ _____________________ “Greed is Good” True? __________________________ Wealth of Nations (1776) guides private interest to the public good

9 Consumer Surplus Value is ________________________ ____________ The price is _____________________ Consumer surplus is ______________ _______________________________ The demand curve shows buyers’ ____________ how much consumers are willing to pay how much they have to pay the value consumers receive above and beyond the price they paid willingness to pay

10 The Demand for Carwashes Demand $4 $2.50 $5 $7 $11 $2 $ Q (thousands of carwashes) Price ($ per carwash) 7 A B C D Reading: Figure 9.1 CS

11 Producer Surplus The marginal cost is______________ ______________________________ The price is _____________________ Producer surplus is _______________ _______________________________ The supply curve shows sellers’ _________________________ what producers get above and beyond their marginal cost what they actually get the lowest price at which sellers would sell an extra unit willingness to sell

12 The Supply of Carwashes Supply $4 $2.50 $5 $7 $11 $2 $ Q (thousands of carwashes) Price ($ per carwash) 7 X Y Z Reading: Figure 9.1 PS COST

The area of a triangle is 1/2 height times length:.5*h*l Supply Demand $5 $11 $2 6 Q (thousands of carwashes) Price ($ per carwash) Consumer Surplus =.5 (11-5) (6-0) =.5 (6) (6) = 18 Producer Surplus =.5 (5-2)(6-0) =.5 (3) (6) = 9 Seller Cost = (2-0) (6-0) +.5 (5-2)(6-0) = = 21 Buyer Value = Revenue + CS = 48 Seller Revenue = Cost + PS = 30 PS CS COST A B C X Y Z

14 The Invisible Hand vs. a $4 Price Ceiling Who is hurt? Supply Demand $4 $5 $8 $11 $2 $ Q (thousands of carwashes) Price ($ per carwash) 7 B E W D A Y Reading: Figure 9.2,9.3, 9.4. Who is helped by the $4 price? 4

15 The $4 Price Ceiling Creates Deadweight Loss If Quantity = 4: CS =.5(11-7)(4-0)+ (7-4)(4-0) = = 20 PS =.5(4-2) (4-0) = 4 CS + PS = 24 DWL = = 3 If Quantity = 6 CS = 18 PS = 9 CS + PS = 27 Supply Demand $4 $5 $7 $11 $2 $10 46 Q (thousands of carwashes) Price ($ per carwash) 7 PS CS W E DWL

16 Another Way to Calculate Deadweight Loss DWL =.5*height*length =.5 (7-4) (6-4) =.5(3)(2) = 3 Supply Demand Q (thousands of carwashes) Price ($ per carwash) 7 PS CS A B D Y W E DWL

17 What is the deadweight loss if Q= 2? (a) Between $0 and $2.99 (b) Between $3 and $3.99 (c) Between $4 and $10 (d) Between $10.01 and $13 (e) More than $13.01 Supply Demand Q (thousands of carwashes) Price ($ per carwash) (1/2) (9-3)(6-2)= 12

18 Requirements for Perfect Competition Well-Defined Property Rights Many Buyers and Sellers (Price takers) Homogeneous Product Free Entry and Exit Perfect Information (on product, price) No Externalities (no spillovers) ______________________________ Well-Defined Property Rights Many Buyers and Sellers (price takers) Homogeneous Products Free Entry Perfect Information (on product, price) No Externalities (no spillovers)

19 Is Gasoline Competitive? Well-Defined Property Rights? Many Buyers and Sellers? Homogeneous Product? Free Entry? Perfect Information? No Externalities?

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