1 chapter 10 the partial equilibrium competitive model: -market demand -market supply copyright...

1

Chapter 10

THE PARTIAL EQUILIBRIUM COMPETITIVE MODEL:

-Market demand

-Market supply

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

2

Market Demand

We start by studying the demand of the market

3

Market Demand

• Assume that there are only two goods (x and y)

– An individual’s demand for x is

Quantity of x demanded = x(px,py,I)

– If we use i to reflect each individual in the market, then the market demand curve is

n

iiyxi ppxX

1

),,( for demand Market I

4

Market Demand

• To construct the market demand curve, PX is allowed to vary while Py and the income of each individual are held constant

• If each individual’s demand for x is downward sloping, the market demand curve will also be downward sloping

5

Market Demand

x xx

pxpxpx

x1* x2*

px*

To derive the market demand curve, we sum thequantities demanded at every price

x1

Individual 1’sdemand curve

x2

Individual 2’sdemand curve

Market demandcurve

X*

X

x1* + x2* = X*

6

Shifts in the MarketDemand Curve

• The market demand summarizes the ceteris paribus relationship between X and px

– changes in px result in movements along the curve

(change in quantity demanded)

– changes in other determinants of the demand for X

cause the demand curve to shift to a new position

(change in demand)

– See example 10.1 in the book to see how to do it

mathematically

7

Elasticity of Market Demand• The price elasticity of market demand is

measured by

X

P

P

PPXe X

X

yXPX X

),,(,

I

• Market demand is characterized by whether demand is elastic (eX,Px <-1) or inelastic (0> eX,Px > -1)

8

Elasticity of Market Demand

• The cross-price elasticity of market demand is measured by

X

P

P

PPXe y

y

yXPX y

),,(,

I

• The income elasticity of market demand is measured by

X

I

I

PPXe yX

IX

),,(,

I

9

• We will study supply of the market and the market equilibrium

• The way the equilibrium is determined depends on whether we are studying short run, or long run

• From the time being, we will focus our attention on studying the equilibrium in perfectly competitive industries

10

Perfect Competition• A perfectly competitive industry is one that

obeys the following assumptions:– each firm attempts to maximize profits– there are a large number of firms, each producing

the same homogeneous product– each firm is a price taker

• its actions have no effect on the market price

– information is perfect• Product characteristics, technology, prices are common

knowledge

– transactions are costless• Buyers and sellers incur no costs in making exchanges

11

Timing of the Supply Response• In the analysis of competitive pricing, the time period

under consideration is important• The time period will be important to determine the supply

curve– very short run (not very interesting, we will not study it…)

– short run• existing firms can alter their quantity supplied by

altering the quantity of the variable input (labour), but quantity of fixed inputs cannot be changed, hence no new firms can enter the industry

– long run• new firms may enter an industry

12

Market Supply in the short run• The quantity of output supplied to the

entire market in the short run is the sum of the quantities supplied by each firm– the amount supplied by each firm depends

on price

• The short-run market supply curve will be upward-sloping because each firm’s short-run supply curve has a positive slope

13

Determination of the eq. Price in the short run

• The number of firms in an industry is fixed

• These firms are able to adjust the quantity they are producing– they can do this by altering the levels of the

variable inputs they employ

14

Short-Run Market Supply Function

• The short-run market supply function shows total quantity supplied by each firm to a market

n

ixixs wvPqwvPX

1

),,(),,(

• Firms are assumed to face the same market price and the same prices for inputs

15

Short-Run Market Supply Curve

quantity Quantityquantity

PPP

q1A q1

B

P1

To derive the market supply curve, we sum thequantities supplied at every price

sA

Firm A’ssupply curve sB

Firm B’ssupply curve

Market supplycurve

Q1

S

q1A + q1

B = Q1

16

Short-Run Supply Elasticity

• The short-run supply elasticity describes the responsiveness of quantity supplied to changes in market price

S

SPS Q

P

P

Q

P

Qe

in change %

supplied in change %,

• Because price and quantity supplied are positively related, eS,P > 0

• See example 10.2 in the book

17

Equilibrium Price Determination in the SR

• We have studied the market demand

• We have studied the short run supply curve

• So, we can study the short run market equilibrium

18

Equilibrium Price Determination in the SR

• An equilibrium price is one at which quantity demanded is equal to quantity supplied

• In an equilibrium price: – suppliers are supplying the optimal quantity given

the price and constraints, and demanders are demanding their optimal quantity…

– neither suppliers nor demanders have an incentive to alter their economic decisions

• An equilibrium price (P*) solves the equation:

),*,(),*,( wvPXPPX xSyxD I

19

Equilibrium Price Determination

• The equilibrium price depends on many exogenous factors:– Demand curves depend on other goods prices, income,

preferences (utility function)– Supply curves depend on inputs prices– changes in any of these factors will likely result in a new

equilibrium price

• Economists predict the new situation by computing the new equilibrium. The equilibrium is an economist’s prediction of the new situation after a change has taken place

20

Equilibrium Price Determination

Quantity

Price

S

D

Q1

P1

The interaction betweenmarket demand and marketsupply determines theequilibrium price

21

Market Reaction to aShift in Demand

Quantity

Price

S

D

Q1

P1

Q2

P2 Equilibrium price andequilibrium quantity willboth rise

If many buyers experiencean increase in their demands,the market demand curvewill shift to the right

D’

22

Market Reaction to aShift in Demand

Quantity

PriceSMC

q1

P1

This is the short-runsupply response to anincrease in market price

q2

P2

If the market price rises, firms will increase their level of output

SAC

23

Shifts in Supply and Demand Curves

• Demand curves shift because– incomes change– prices of substitutes or complements change– preferences change

• Supply curves shift because– input prices change– technology changes– number of producers change

24

Shifts in Supply and Demand Curves

• When either a supply curve or a demand curve shift, equilibrium price and quantity will change

• The relative magnitudes of these changes depends on the shapes of the supply and demand curves (elasticity is very important !!!!)

• See example 10.3 in the book

25

Shifts in Supply

Quantity Quantity

PricePriceS

S’S

S’

DD

PP

Q

P’

Q’

P’

QQ’

Elastic Demand Inelastic Demand

Small increase in price,large drop in quantity

Large increase in price,small drop in quantity

26

Shifts in Demand

Quantity Quantity

PricePrice

S

S

D D

P P

Q

P’

Q’

P’

Q Q’

Elastic Supply Inelastic Supply

Small increase in price,large rise in quantity

Large increase in price,small rise in quantity

D’ D’

27

Putting it together…

• Using econometrics, we can estimate the demand and supply curve, and how they depend on other factors (input prices, other goods’ prices…)

• Compute the new equilibrium when these other factors change

• This would be our prediction…• However, it could be enough to estimate the

different elasticities rather than the whole new curves

28

Mathematical Model of Supply and Demand

• Suppose that the demand function is represented by

QD = D(P,)

is a parameter that shifts the demand curveD/ = D can have any sign

D/P = DP < 0

29


• The supply relationship can be shown as

QS = S(P,)

is a parameter that shifts the supply curve

S/ = S can have any sign

S/P = SP > 0

• Equilibrium requires that QD = QS

30


• To analyze the comparative statics of this model, we need to use the total differentials of the supply and demand functions:

dQD = DPdP + Dd

dQS = SPdP + Sd

• Maintenance of equilibrium requires thatdQD = dQS

31


• Suppose that the demand parameter () changed while remains constant

• The equilibrium condition requires thatDPdP + Dd = SPdP

PP DS

DP

• Because SP - DP > 0, P/ will have the same sign as D

32


• We can convert our analysis to elasticities

PDS

D

P

Pe

PPP

,

PQPS

Q

PP

P ee

e

QP

DS

QD

e,,

,,

)(

Dividing numerator and denominator by Q…

33

Long-Run Analysis• So far, we have studied short run…• In the long run, a firm may adapt all of its

inputs to fit market conditions– profit-maximization for a price-taking firm

implies that price is equal to long-run MC

• Firms can also enter and exit an industry in the long run– perfect competition assumes that there are

no special costs of entering or exiting an industry

34

Long-Run Analysis• New firms will be lured into any market

for which economic profits are greater than zero– entry of firms will cause the short-run

industry supply curve to shift outward– market price and profits will fall– the process will continue until economic

profits are zero

35

Long-Run Analysis

• Existing firms will leave any industry for which economic profits are negative– exit of firms will cause the short-run industry

supply curve to shift inward– market price will rise and losses will fall– the process will continue until economic

profits are zero

36

Long-Run Competitive Equilibrium

• A perfectly competitive industry is in long-run equilibrium if there are no incentives for profit-maximizing firms to enter or to leave the industry– That is, if profits are are zero in the long-

run equilibrium– this will occur when the number of firms is

such that P = MC = AC and each firm operates at minimum AC

37

Long-Run Competitive Equilibrium

• We will assume that all firms in an industry have identical cost curves– no firm controls any special resources or

technology

• The equilibrium long-run position requires that each firm earn zero economic profit

38

Long-Run Equilibrium: Constant-Cost Case

• Assume that the entry of new firms in an industry has no effect on the cost of inputs– no matter how many firms enter or leave

an industry, a firm’s cost curves will remain unchanged

• This is referred to as a constant-cost industry (Example 10.5)

39


A Typical Firm Total MarketQuantity Quantity

SMC MC

AC

S

D

q1

P1

Q1

This is a long-run equilibrium for this industry

P = MC = ACPrice Price

40


A Typical Firm Total Market

q1 Quantity Quantity

SMC MC

AC

S

D

P1

Q1

P2

Market price rises to P2

Q2

Suppose that market demand rises to D’

D’

Price Price

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SMC MC

AC

S

D

P1

Q1

D’

P2

Economic profit > 0

Q2

In the short run, each firm increases output to q2

q2

Price Price

42




SMC MC

AC

S

D

P1

Q1

D’

Economic profit will return to 0

Q3

In the long run, new firms will enter the industry

S’

PricePrice

43




SMC MC

AC

S

D

P1

Q1

D’

Q3

S’

The long-run supply curve will be a horizontal line (infinitely elastic) at p1

LS

Price Price

44

Shape of the Long-Run Supply Curve

• The zero-profit condition is the factor that determines the shape of the long-run cost curve– if average costs are constant as firms enter,

long-run supply will be horizontal– if average costs rise as firms enter, long-run

supply will have an upward slope– if average costs fall as firms enter, long-run

supply will be negatively sloped

45

Long-Run Equilibrium: Increasing-Cost Industry

• The entry of new firms may cause the average costs of all firms to rise– prices of scarce inputs may rise– new firms may impose “external” costs on

existing firms– new firms may increase the demand for

tax-financed services

46


A Typical Firm (before entry) Total Market


SMC MC

AC

S

D

P1

Q1

Suppose that we are in long-run equilibrium in this industry

P = MC = ACPricePrice

47




SMC MC

AC

S

D

P1

Q1


D’

P2

Market price rises to P2 and firms increase output to q2

Q2q2

Price Price

48


A Typical Firm (after entry) Total MarketQuantity Quantity

SMC’ MC’

AC’

S

D

P1

Q1

D’

q3

P3

Entry of firms causes costs for each firm to rise

Q3

Positive profits attract new firms and supply shifts out

S’

Price Price

49


A Typical Firm (after entry) Total Market


SMC’ MC’

AC’

S

D

p1

Q1

D’

p3

Q3

S’

The long-run supply curve will be upward-sloping

LS

Price Price

50

Long-Run Equilibrium: Decreasing-Cost Industry

• The entry of new firms may cause the average costs of all firms to fall– new firms may attract a larger pool of

trained labor– entry of new firms may provide a “critical

mass” of industrialization• permits the development of more efficient

transportation and communications networks

51

Long-Run Equilibrium: Decreasing-Cost Case



SMC MC

AC

S

D

P1

Q1

Suppose that we are in long-run equilibrium in this industry

P = MC = ACPrice Price

52




SMC MC

AC

S

D

P1

Q1


D’

P2

Market price rises to P2 and firms increase output to q2

Q2q2

Price Price

53




SMC’MC’

AC’

S

D

P1

Q1

D’P3

Entry of firms causes costs for each firm to fall

Q3q3

Positive profits attract new firms and supply shifts out

S’

PricePrice

54




SMC’MC’

AC’

S

D

P1

Q1

The long-run industry supply curve will be downward-sloping

D’P3

Q3q3

S’

LS

Price Price

55

Classification of Long-Run Supply Curves

• Constant Cost– entry does not affect input costs– the long-run supply curve is horizontal at

the long-run equilibrium price

• Increasing Cost– entry increases inputs costs– the long-run supply curve is positively

sloped

56

Classification of Long-Run Supply Curves

• Decreasing Cost– entry reduces input costs– the long-run supply curve is negatively

sloped

57

Long-Run Elasticity of Supply

• The long-run elasticity of supply (eLS,P) records the proportionate change in long-run industry output to a proportionate change in price

LS

LSPLS Q

P

P

Q

P

Qe

in change %

in change %,

• eLS,P can be positive or negative

– the sign depends on whether the industry exhibits increasing or decreasing costs

58

Comparative Statics Analysis of Long-Run Equilibrium

• Comparative statics analysis of long-run equilibria can be conducted using estimates of long-run elasticities of supply and demand

• Remember that, in the long run, the number of firms in the industry will vary from one long-run equilibrium to another

59


• Assume that we are examining a constant-cost industry

• Suppose that the initial long-run equilibrium industry output is Q0 and the typical firm’s output is q* (where AC is minimized)

• The equilibrium number of firms in the industry (n0) is Q0/q*

60


• A shift in demand that changes the equilibrium industry output to Q1 will change the equilibrium number of firms to

n1 = Q1/q*

• The change in the number of firms is

*q

QQnn 01

01

– completely determined by the extent of the demand shift and the optimal output level for the typical firm

61


• The effect of a change in input prices can also be studied– See example 10.6 in the book

62

Important Points to Note:• In the short run, equilibrium prices are

established by the intersection of what demanders are willing to pay (as reflected by the demand curve) and what firms are willing to produce (as reflected by the short-run supply curve)– these prices are treated as fixed in both

demanders’ and suppliers’ decision-making processes

63

Important Points to Note:• A shift in either demand or supply will

cause the equilibrium price to change– the extent of such a change will depend on

the slopes of the various curves

• Firms may earn positive profits in the short run– because fixed costs must always be paid,

firms will choose a positive output as long as revenues exceed variable costs

64

Important Points to Note:• In the long run, the number of firms is

variable in response to profit opportunities– the assumption of free entry and exit implies

that firms in a competitive industry will earn zero economic profits in the long run (P = AC)

– because firms also seek maximum profits, the equality P = AC = MC implies that firms will operate at the low points of their long-run average cost curves

65

Important Points to Note:• The shape of the long-run supply curve

depends on how entry and exit affect firms’ input costs– in the constant-cost case, input prices do not

change and the long-run supply curve is horizontal

– if entry raises input costs, the long-run supply curve will have a positive slope

66

Important Points to Note:

• Changes in long-run market equilibrium will also change the number of firms– precise predictions about the extent of these

changes is made difficult by the possibility that the minimum average cost level of output may be affected by changes in input costs or by technical progress

67


• If changes in the long-run equilibrium in a market change the prices of inputs to that market, the welfare of the suppliers of these inputs will be affected– such changes can be measured by changes

in the value of long-run producer surplus

68

Chapter 11

APPLIED COMPETITIVE ANALYSIS

Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved.

69

Economic Efficiency and Welfare Analysis

• The area between the demand and the supply curve represents the sum of consumer and producer surplus– measures the total additional value

obtained by market participants by being able to make market transactions

• This area is maximized at the competitive market equilibrium

70


Quantity

Price

P *

Q *

S

D

Consumer surplus is thearea above price and belowdemand

Producer surplus is thearea below price andabove supply

71

At output Q1, total surpluswill be smaller


Quantity

Price

P *

Q *

S

D

Q1

At outputs between Q1 andQ*, demanders would valuean additional unit more thanit would cost suppliers toproduce

72


• This tell us that under the assumptions that we have used (competitive industry), the government must argue why she was to alter the equilibrium price through policy

73

Welfare Loss Computations

• Use of consumer and producer surplus notions makes possible the explicit calculation of welfare losses caused by restrictions on voluntary transactions– in the case of linear demand and supply

curves, the calculation is simple because the areas of loss are often triangular

74


• Suppose that the demand is given by

QD = 10 - P

and supply is given by

QS = P - 2

• Market equilibrium occurs where P* = 6 and Q* = 4

75


• Restriction of output to Q0 = 3 would create a gap between what demanders are willing to pay (PD) and what suppliers require (PS)

PD = 10 - 3 = 7

PS = 2 + 3 = 5

76

The welfare loss from restricting outputto 3 is the area of a triangle


Quantity

Price

S

D

6

4

7

5

3

The loss = (0.5)(2)(1) = 1

77


• The welfare loss will be shared by producers and consumers

• In general, it will depend on the price elasticity of demand and the price elasticity of supply to determine who bears the larger portion of the loss– the side of the market with the smallest

price elasticity (in absolute value)

78

Price Controls and Shortages

• Sometimes governments may seek to control prices at below equilibrium levels– this will lead to a shortage

• We can look at the changes in producer and consumer surplus from this policy to analyze its impact on welfare

79


Quantity

PriceSS

D

LS

P1

Q1

Initially, the market isin long-run equilibriumat P1, Q1

Demand increases to D’

D’

80


Quantity

PriceSS

D

LS

P1

Q1

D’

Firms would begin toenter the industry

In the short run, pricerises to P2

P2

The price would endup at P3

P3

81


Quantity

PriceSS

D

LS

P1

Q1

D’

P3

There will be a shortage equal toQ2 - Q1

Q2

Suppose that thegovernment imposesa price ceiling at P1

82

This gain in consumersurplus is the shadedrectangle


Quantity

PriceSS

D

LS

P1

Q1

D’

P3

Q2

Some buyers will gain because they can purchase the good for a lower price

83

The shaded rectangletherefore represents apure transfer fromproducers to consumers


Quantity

Price

D

P1

Q1

D’

SS

LSP3

Q2

The gain to consumers is also a loss to producers who now receive a lower price

No welfare loss there

84

This shaded trianglerepresents the value of additional consumer surplus that would have been attained without the price control


Quantity

PriceSS

D

LS

P1

Q1

D’

P3

Q2

85

This shaded trianglerepresents the value of additional producer surplus that would have been attained without the price control


Quantity

PriceSS

D

LS

P1

Q1

D’

P3

Q2

86

This shaded arearepresents the total value of mutually beneficial transactions that are prevented by the government


Quantity

PriceSS

D

LS

P1

Q1

D’

P3

Q2

This is a measure of the pure welfare costs of this policy

87

Disequilibrium Behavior• Notice that there are customers

willing to pay more to buy the good

• This could lead to a black market

88

Tax Incidence

• To discuss the effects of a per-unit tax (t), we need to make a distinction between the price paid by buyers (PD) and the price received by sellers (PS)

PD - PS = t

• In terms of small price changes, we wish to examine

dPD - dPS = dt

89

Tax Incidence

• Maintenance of equilibrium in the market requires

dQD = dQS

or

DPdPD = SPdPS

• Substituting, we get

DPdPD = SPdPS = SP(dPD - dt)

90

Tax Incidence

• We can now solve for the effect of the tax on PD:

DS

S

PP

PD

ee

e

DS

S

dt

dP

• Similarly,

DS

D

PP

PS

ee

e

DS

D

dt

dP

91

Tax Incidence

• Because eD 0 and eS 0, dPD /dt 0 and dPS /dt 0

• If demand is perfectly inelastic (eD = 0), the per-unit tax is completely paid by demanders

• If demand is perfectly elastic (eD = ), the per-unit tax is completely paid by suppliers

92

Tax Incidence

• In general, the actor with the less elastic responses (in absolute value) will experience most of the price change caused by the tax

S

D

D

S

e

e

dtdP

dtdP

/

/

93

Tax Incidence

Quantity

PriceS

D

P*

Q*

PD

PS

A per-unit tax creates awedge between the pricethat buyers pay (PD) andthe price that sellers receive (PS)

t

Q**

94

Buyers incur a welfare lossequal to the shaded area

Tax Incidence

Quantity

PriceS

D

P*

Q*

PD

PS

Q**

But some of this loss goesto the government in theform of tax revenue

95

Sellers also incur a welfareloss equal to the shaded area

Tax Incidence

Quantity

PriceS

D

P*

Q*

PD

PS

Q**

But some of this loss goesto the government in theform of tax revenue

96

Therefore, this is the dead-weight loss from the tax

Tax Incidence

Quantity

PriceS

D

P*

Q*

PD

PS

Q**

97

Deadweight Loss and Elasticity

• All nonlump-sum taxes involve deadweight losses– the size of the losses will depend on the

elasticities of supply and demand

• A linear approximation to the deadweight loss accompanying a small tax, dt, is given by

DW = -0.5(dt)(dQ)

98


• From the definition of elasticity, we know that

dQ = eDdPD Q0/P0

• This implies that

dQ = eD [eS /(eS - eD)] dt Q0/P0

• Substituting, we get

00

2

0

50 QPeeeeP

dtDW DSSD )]/([.

99


• Deadweight losses are zero if either eD or eS are zero

– the tax does not alter the quantity of the good that is traded

• Deadweight losses are smaller in situations where eD or eS are small

100

Transactions Costs• Transactions costs can also create a

wedge between the price the buyer pays and the price the seller receives– real estate agent fees– broker fees for the sale of stocks

• If the transactions costs are on a per-unit basis, these costs will be shared by the buyer and seller– depends on the specific elasticities involved

101

Gains from International Trade

Quantity

Price

S

D

Q*

P*

In the absence ofinternational trade,the domesticequilibrium price would be P* andthe domesticequilibrium quantitywould be Q*

102


Quantity

Price

Q*

P*

S

D

Quantity demanded willrise to Q1 and quantitysupplied will fall to Q2

Q1Q2

If the world price (PW)is less than the domesticprice, the price will fallto PW

PW

Imports = Q1 - Q2

imports

103

Consumer surplus rises

Producer surplus falls

There is an unambiguouswelfare gain


Quantity

Price

Q*

P*

S

D

Q2Q1

PW

104

Effects of a Tariff

Quantity

Price

S

D

Q1Q2

PW

Quantity demanded fallsto Q3 and quantity suppliedrises to Q4

Q4 Q3

Suppose that the governmentcreates a tariff that raisesthe price to PR

PR

Imports are now Q3 - Q4

imports

105

Consumer surplus falls

Producer surplus rises

These two triangles represent deadweight loss

The government getstariff revenue

Effects of a Tariff

Quantity

Price

S

D

Q1Q2

PW

Q4 Q3

PR

106

Quantitative Estimates of Deadweight Losses

• Estimates of the sizes of the welfare loss triangle can be calculated

• Because PR = (1+t)PW, the proportional change in quantity demanded is

DDW

WR teeP

PP

Q

QQ

1

13

107

The areas of these twotriangles are

Quantitative Estimates of Deadweight Losses

Quantity

Price

S

D

Q1Q2

PW

Q4 Q3

PR

))((. 311 50 QQPPDW WR

12

1 50 QPetDW WD.

))((. 242 50 QQPPDW WR

22

2 50 QPetDW WS.

108

Other Trade Restrictions• A quota that limits imports to Q3 - Q4

would have effects that are similar to those for the tariff– same decline in consumer surplus– same increase in producer surplus

• One big difference is that the quota does not give the government any tariff revenue– the deadweight loss will be larger

109

Trade and Tariffs• If the market demand curve is

QD = 200P-1.2

and the market supply curve is

QS = 1.3P,

the domestic long-run equilibrium will occur where P* = 9.87 and Q* = 12.8

110

Trade and Tariffs• If the world price was PW = 9, QD would

be 14.3 and QS would be 11.7

– imports will be 2.6

• If the government placed a tariff of 0.5 on each unit sold, the world price will be PW = 9.5

– imports will fall to 1.0

111

Trade and Tariffs• The welfare effect of the tariff can be

calculated

DW1 = 0.5(0.5)(14.3 - 13.4) = 0.225

DW2 = 0.5(0.5)(12.4 - 11.7) = 0.175

• Thus, total deadweight loss from the tariff is 0.225 + 0.175 = 0.4

112

Important Points to Note:• The concepts of consumer and producer

surplus provide useful ways of analyzing the effects of economic changes on the welfare of market participants– changes in consumer surplus represent

changes in the overall utility consumers receive from consuming a particular good

– changes in long-run producer surplus represent changes in the returns product inputs receive

113


• Price controls involve both transfers between producers and consumers and losses of transactions that could benefit both consumers and producers

114

Important Points to Note:• Tax incidence analysis concerns the

determination of which economic actor ultimately bears the burden of a tax– this incidence will fall mainly on the actors

who exhibit inelastic responses to price changes

– taxes also involve deadweight losses that constitute an excess burden in addition to the burden imposed by the actual tax revenues collected

115


• Transaction costs can sometimes be modeled as taxes– both taxes and transaction costs may affect

the attributes of transactions depending on the basis on which the costs are incurred

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• Trade restrictions such as tariffs or quotas create transfers between consumers and producers and deadweight losses of economic welfare– the effects of many types of trade

restrictions can be modeled as being equivalent to a per-unit tariff

1 chapter 10 the partial equilibrium competitive model: -market demand -market supply copyright...

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market priceinformation

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market supply functionth

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