p f ** = 2.00 p c = 2.40 p f = 2.00 equilibrium review: illustrating the effect of a tax. p...

PF** = 2.00

PC = 2.40 PF = 2.00

Equilibrium

Review: Illustrating the effect of a tax.

P ($/gallon)

Q (thousands of gallon per day)

P* = 2.10

Q* = 8,000

.40

PC** = 2.40

Q** = 7,500

D

S

The point on the demand curve is the equilibrium price from the perspective of consumers.

Start at the no tax equilibrium and move left until the vertical gap between the demand and supply curves equals the amount of the tax.

The point on the supply curve is the equilibrium price from the perspective of firms.

8,000 = 8,000

Tax: PF = PC TaxPF = PC .40

Quantity demanded determined by PC

Quantity supplied determined by PF

P = 2.10

7,500 = 7,500

Quantity Demanded Quantity Supplied

The associated quantity is the new equilibrium quantity.The price from the perspective of consumers increases, but by less than the full amount of the tax.

The equilibrium quantity decreases.

The price from the perspective of firms decreases, but by less than the full amount of the tax.Even though the legal incidence is entirely borne by the firm, the burden is shared by both firms and consumers.

First, the no tax equilibrium.

Question: How can we quantify the burden borne by consumers and firms?

Question: Why do we move to the left rather than the right?

Greatest Amount aStudent Student Would Pay

275225175100

7525

AndyKateDanLizMegNed

1 42 3 65

50

100

150

200

250

Q

P

D

Consumer Surplus and Producer SurplusMarket Demand Curve for Tutors

Revealed PreferenceWhen the price of a good is $xxx and an individual, call him Joe,

does purchase the good does not purchase the good

Joe values the benefits of the good by at least $xxx

Joe values the benefits of the

good by less than $xxx

Value Joe places on the benefits $xxx

Value Joe places on the benefits < $xxx

Question: By how much does each student value the

benefits of tutoring services?

Joe’s actions reveal his

preferences.

How many students would hire a tutor if the tutor’s “price” was

______, given that …?3002802752302251801007525175 1234560

300

Greatest AmountStudent a Student Would Pay

275225175125

7525


Question: By how much does Andy value the benefits of tutoring services?

If the price of tutoring services $275

Andy would purchase

tutoring services.

Value Andy places on the

benefits $275

If the price of tutoring services were $276

Andy would not purchase

tutoring services.

Value Andy places on the

benefits < $276

Value Andy places on the benefits of tutoring services = $275.

The value a student places on the benefits of tutoring services

equalsGreatest amount the

student would pay for tutoring services

Value of Benefits

Question: Why do the values differ from student to student?

Claim:

Question: By how much does each student value the benefits of tutoring services?

Consumer Surplus

Value of Net Benefit of Receiving Tutoring ServicesStudent Tutoring Benefits If price = $250 If price = $150 If price = $50

$25-----

$25

$1257525

---

$225

$225175125

5025

-

$600

275225175125

7525


Consumer Surplus

The value a student places on the benefits of tutoring services

equalsGreatest amount the

student would pay for tutoring services

Consumer Surplus: Net benefit buyers enjoy from purchasing and consuming the good.

1 42 3 65

50

100

150

200

250

Q

P

D

300

Greatest Amounta Student Would Pay Net Benefit of Receiving Tutoring Services

Student Value of Benefits If price = $250 If price = $150 If price = $50

$25-----

$25

$1257525

---

$225

$225175125

5025

-

$600

275225175125

7525


Consumer SurplusConsumer Surplus: Net benefit buyers enjoy from purchasing and consuming the good.

Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good.

Consumer Surplus: The benefit each buyer enjoys from consuming the good less what each buyer must pay for the good.

Area Beneath the Market Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good.

Least Amount Requiredto Induce a Major

Student to Be a Tutor

275225200125

7525

KimJohnAdamLisaWaltBeth

1 42 3 65Q

P

S

Market Supply Curve for Tutors

Revealed PreferenceWhen the price of a good is $xxx and an individual, Joe,

does purchase the good does not purchase the good

Joe values the benefits of the good by at least $xxx

Joe values the benefits of the

good by less than $xxx

Value Joe places on the benefits $xxx

Value Joe places on the benefits < $xxx

Question: What is each major’s

opportunity cost of providing tutoring

services?

How many majors would agree to be a tutor if the tutor’s “price”

was ______, given that …?202575125200225275 0123456

50

100

150

200

250

300

Least Required to Inducea Major to Provide

Student Tutoring Services275225200125

7525

KimJohnRalphLisaWaltBeth

The value of a major’s opportunity cost of providing tutoring

services

equals

The least amount required to induce a

major to provide tutoring services

Opportunity cost represents whatever is

foregone when an activity is pursued.

Question: What is Beth’s opportunity cost of

providing tutoring services?


Beth would not provide

tutoring services.

Value Beth places on the

“other activity” > $24


Beth would provide

tutoring services.

Value Beth places on the

“other activity” $25

Value Beth places on the “other activity” = $25.

Beth would pursue the

“other activity.”

Beth would not pursue

the “other activity.”

Beth’s opportunity cost of providing tutoring services

equalsthe value she places on the benefits she receives from

the “other activity.”

Beth’s opportunity cost of providing tutoring services = $25.

Opportunity Cost

Question: Why do the opportunity costs of the majors differ?

Question: What is each major’s opportunity cost of providing tutoring services?

Claim:

Producer Surplus

Least Required to Inducea Major to ProvideTutoring Services Net Benefit of Providing Tutoring Services

Student Opportunity Cost If price = $50 If price = $150 If price = $250

-----

25

25

---

2575

125

225

-2550

125175225

600

275225200125

7525


Producer Surplus

The value of a major’s opportunity cost of

providing tutoring services

equalsThe least required to

induce a major to provide tutoring services

Producer Surplus: Net benefit sellers enjoy from production and sale the good.

1 42 3 65Q

PS

50

100

150

200

250

300

Opportunity Costof Providing Net Benefit of Providing Tutoring Services

Student Tutoring Services If price = $50 If price = $150 If price = $250-----

25

25

---

2575

125

225

-2550

125175225

600

275225200125

7525


Producer Surplus

Producer Surplus: The net benefit sellers enjoy from producing and selling the good.

Height of Market Supply Curve: The seller’s opportunity cost of providing a specific unit of the good.

Producer Surplus: What each seller receives from the sale of the good less the opportunity cost each seller incurs by providing it.

Area Above the Market Supply Curve Lying Beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good.

Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good.Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good.

Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good; the benefit each buyer enjoys from consuming the good less what each buyer must pay.Area Beneath the Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good.

Summary: Consumer and Producer Surplus

Producer Surplus: The net benefit sellers enjoy from producing and selling the good

Height of Market Supply Curve: The seller’s opportunity cost of providing a specific unit of the good.

Producer Surplus: The net benefit sellers enjoy from producing and selling the good; what each seller receives from the sale of the good less the opportunity cost each seller incurs by providing it.Area above the Supply Curve Lying beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good.

p f ** = 2.00 p c = 2.40 p f = 2.00 equilibrium review: illustrating the effect of a tax. p...

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