INTRODUCTION TO MICROECONOMICS

Graphs and Tables

Part #1

Figure II-1.1: The Increased Coordination of Decentralized Decision-makers’ Plans

Producers(make plans)

Consumers(make plans)

Produce too muchConsume too little

ErrorCorrection P decrease

Produce too littleConsume too much

ErrorCorrection P increase

Figure II-1.2: Basic Structure of a Market

PRODUCERS

COMPETITION

CONSUMERS

COMPETITION

COOPERATION COOPERATION

Table II-2: Demand Schedule for Gasoline P QD $1.00 250 $1.50 225 $2.00 200 $2.50 175 $3.00 150 $3.50 125 $4.00 100 $4.50 75 $5.00 50 $5.50 25 $6.00 00 P = Price QD = Quantity Demanded

Figure II-2: Demand Curve for Gasoline

DQ

$6

$5

$4

50 100

P

Table II-3: Supply Schedule for Gasoline P QS $1.00 0 $1.50 25 $2.00 50 $2.50 75 $3.00 100 $3.50 125 $4.00 150 $4.50 175 $5.00 200 $5.50 225 $6.00 250 P = Price QS = Quantity Supplied

Figure II-3: Supply Curve of Gasoline

P

Q

S

$1

$2

50

$3

100

Table II-4: The Market for Gasoline--Supply and Demand Schedules Combined

P QD QS

$1.00 250 0 $1.50 225 25 $2.00 200 50 $2.50 175 75 $3.00 150 100 $3.50 125 125 $4.00 100 150 $4.50 75 175 $5.00 50 200 $5.50 25 225 $6.00 0 250

Figure II-4.1: The Market for Gasoline--Supply and Demand Curves

P

Q

S

D

$3.50

$6.00

$1.00

125

Figure II-4.2: Excess Supply of Gasoline

P

Q

S

D

ES

$3.50

$4.50

12575 175

ES = QS - QD =

$6.00

$1.00

Figure II-4.2a: Excess Supply of Gasoline

P

Q

S

D

ES

$3.50

$4.50

12575 175

$6.00

$1.00

$4.00

At P = $4, ES =

Figure II-4.3: Excess Demand for Gasoline

P

Q

S

DED

$3.50

$2.50

12575 175

$6.00

$1.00

ED = QD - QS =

Figure II-4.3a: Excess Demand for Gasoline

P

Q

S

DED

$3.50

$2.50

12575 175

$6.00

$1.00

$3.00

When P = $3.00, ED =

Table II-5a: An Increase in Demand, QD1

P QD0 QD

1 QD

2 QS

$1.00 250 300 00 $1.50 225 275 25 $2.00 200 250 50 $2.50 175 225 75 $3.00 150 200 100 $3.50 125 175 125 $4.00 100 150 150 $4.50 75 125 175 $5.00 50 100 200 $5.50 25 75 225 $6.00 00 50 250

Figure II-5.1: An Increase in Demand

Q

P

D0

D1$3.50

$6.00

$7.00

125 175

(1) An Increase in Demand(2) An Increase in the Quantity Demanded At Each Price

Table II-5b: A Decrease in Demand, QD2

P QD0 QD

1 QD

2 QS

$1.00 250 300 00 $1.50 225 275 25 $2.00 200 250 50 $2.50 175 225 75 $3.00 150 200 100 $3.50 125 175 125 $4.00 100 150 150 $4.50 75 125 175 $5.00 50 100 200 $5.50 25 75 225 $6.00 00 50 250

Figure II-5.2: An Increase in the Quantity Demanded

D0

Q

P

$6.00

$3.50$2.50

125 175

A Movement Along a Given Demand Curve

1

2

Table II-5c: Summary of a Crucial Distinction

Cause Effect Language

Shift in the Demand Curve

Increase or Decrease in Demand

Movement Along a Given Demand Curve

Increase or Decrease in the Quantity Demanded

Table II-5a: An Increase in Demand, QD1

P QD0 QD

1 QD

2 QS

$1.00 250 300 00 $1.50 225 275 25 $2.00 200 250 50 $2.50 175 225 75 $3.00 150 200 100 $3.50 125 175 125 $4.00 100 150 150 $4.50 75 125 175 $5.00 50 100 200 $5.50 25 75 225 $6.00 00 50 250

Figure II-5.3: The Market for Gasoline Showing An Increase in Demand

P

Q

D0

D1

S

$3.50

$4.00

$6.00

$1.00

$7.00

125 150

Table II-6a: An Increase in Supply, QS1

P QD QS

0 QS

2 QS1

$1.00 250 00 50 $1.50 225 25 75 $2.00 200 50 100 $2.50 175 75 125 $3.00 150 100 150 $3.50 125 125 175 $4.00 100 150 200 $4.50 75 175 225 $5.00 50 200 250 $5.50 25 225 275 $6.00 00 250 300

Figure II-6.1: An Increase in Supply

P

Q

S0S1

$3.50

125 175

(1) Increase in Supply(2) Increase in the Quantity Supplied At Each Price

$1.00

$0.00

Table II-6b: A Decrease in Supply, QS2

P QD QS

0 QS

2 QS1

$1.00 250 00 50 $1.50 225 25 75 $2.00 200 50 100 $2.50 175 75 125 $3.00 150 100 150 $3.50 125 125 175 $4.00 100 150 200 $4.50 75 175 225 $5.00 50 200 250 $5.50 25 225 275 $6.00 00 250 300

Figure II-6.2: An Increase in the Quantity Supplied

P

Q

S0

$1.00

$3.50

$4.50

125 175

A Movement Along a Given Supply Curve

1

2

Table II-6c: Summary of a Crucial Distinction

Cause Effect Language

Shift in the Supply Curve

Increase or Decrease in Supply

Movement Along a Given Supply Curve

Increase or Decrease in the Quantity Supplied

Table II-6a: An Increase in Supply, QS1

P QD QS

0 QS

2 QS1

$1.00 250 00 50 $1.50 225 25 75 $2.00 200 50 100 $2.50 175 75 125 $3.00 150 100 150 $3.50 125 125 175 $4.00 100 150 200 $4.50 75 175 225 $5.00 50 200 250 $5.50 25 225 275 $6.00 00 250 300

Figure II-6.3: The Market for Gasoline Showing An Increase in Supply

Q

P S0 S1

D

$6.00

$3.50$3.00

$1.00

$0.00125 150

Figure II-7: Selling Tickets and Scalping

S

D0

D1

$50

5,000 10,000 20,000

$100

Q

P

D0 = Regular Event Demand CurveD1 = Very Popular Event Demand Curve

Table II-8: The Market for Bicycles P QD QS

0

$20 2,000 00 $30 1,800 200 $40 1,600 400 $50 1,400 600 $60 1,200 800 $70 1,000 1,000 $80 800 1,200 $90 600 1,400 $100 400 1,600 $110 200 1,800 $120 00 2,000

Figure II-8.1: A Consumer’s Surplus

$20

$120

$70

500 1000

D

S

Q

P

CS

CS for the 500th unit = $95 - $70 = $25Consumer gains from trade for 500th unit.

$95

Figure II-8.2: Consumers’ Surplus (CS)

$20

$120

$70

1000

D

S

Q

PCS

CS = 1/2 bh = 1/2(1,000)($120 - $70) = $25,000 = Total consumer gains from trade

Figure II-8.3: A Producer’s Surplus

$20

$120

$70

$45

1,000500

D

S

Q

P

PS for the 500th unit = $70 - $45 = $25Producer gains from trade for 500th unit

PS

Figure II-8.4: Producers’ Surplus (PS)

$20

$120

$70

$45

1,000500

D

S

Q

P

PS = ½ (b)(h) = ½ (1000)($70 - $20) = $25,000 = Total Producer Gains from Trade

PS

Figure II-9: The Social Welfare Maximum

CS = $25,000

PS = $25,000 D

S

Q

P

1,000

$70

$20

$120

Note: (1) The Gains from Trade are Maximized at the Social Welfare Maximum. (2) CS + PS = $50,000

Table II-10a: Imposing Taxes on Producers P QD QS

0 QSTAX =$20

$20 2,000 00 ** $30 1,800 200 ** $40 1,600 400 00 $50 1,400 600 200 $60 1,200 800 400 $70 1,000 1,000 600 $80 800 1,200 800 $90 600 1,400 1,000 $100 400 1,600 1,200 $110 200 1,800 1,400 $120 00 2,000 1,600

How to Adjust the Supply Schedule for a Tax• 1. Choose any quantity supplied (QS) from the supply

schedule, say 1,200.• 2. The minimum price associated with supplying the

1,200th unit is $80.• 3. Since imposing a tax increases the costs of production

for a producer, we should add the tax of $20 to the price of $80, yielding $100 as the minimum price at which a producer is willing and able to produce the 1,200th unit.

• 4. The rest of the numbers for the new supply schedule can be filled in noting that every $10 change in price yields a 200 unit change in the quantity supplied.

• 5. We now have a new supply schedule which represents a decrease in supply

Figure II-10.1: The Effect of a Tax on the Supply Curve

$20

$40

S0

STAX = $20

Q

P

$80

$100

Note that the tax causes a decrease in supply1,200

Figure II-10.2: The Effect of a Tax on a Market

D

S0

STAX=$20

$20

$40

P0 = $70P1 = $80

P2 = $60

$120

P

Q1,000 = Q0Q1 = 800

CS’

PS’

WLTaxRev

Steps for Understanding How a Tax on Producers Affects the Market and Causes a Welfare Loss• 1. Social Welfare Maximum, Original

Equilibrium, P = $70, Q = 1,000• 2. Impose a Tax = $20, Decrease Supply• 3. New Equilibrium, P = $80, Q = 800• 4. New CS’ = ½ (800)($120-$80) = $16,000• 5. New PS’ = ½ (800)($60-$20) = $16,000• 6. Tax Rev = (800)($20) = $16,000• 7. Compare Before and After Tax CS and PS– CS + PS = $50,000– CS’ + PS’ + Tax Rev = $48,000

• 8. WL = ½ ($20)(200) = $2,000

Figure II-10.3: Effect of a Producer Tax• Tax on producers results in misallocation of

resources: Too little output in Taxed Market and too much output in the Rest of Economy

Rest of EconomyMarket

Producer Tax

Resources

OutputDecreases

Output Increases

(Lower Valued Uses)

Producer Tax on Market is equivalent to a subsidy for the Rest of Economy

Table II-10b: Imposing Taxes on Producers

P QD QS0 QS

TAX =$4

$2 10,000 000 $4 9,000 1,000 $6 8,000 2,000 $8 7,000 3,000 $10 6,000 4,000 $12 5,000 5,000 $14 4,000 6,000 $16 3,000 7,000 $18 2,000 8,000 $20 1,000 9,000 $22 000 10,000

Figure II-10.4: The Effect of a Tax on the Supply Curve

$2

S0

Q

P

$10

Figure II-10.5: The Effect of a Tax on the Supply Curve

$2

S0

Q

P

$12

5,000

$22

D

Table II-11: Granting a Subsidy to Producers

P QD QS0 QS

SUB = $20

$20 2,000 00 400 $30 1,800 200 600 $40 1,600 400 800 $50 1,400 600 1,000 $60 1,200 800 1,200 $70 1,000 1,000 1,400 $80 800 1,200 1,600 $90 600 1,400 1,800 $100 400 1,600 2,000 $110 200 1,800 2,200 $120 00 2,000 2,400

How to Adjust the Supply Schedule for a Subsidy• 1. Choose any quantity supplied (QS) from the supply

schedule. Say 1,200.• 2. The minimum price associated with supplying the

1,200th unit is $80.• 3. Since granting a subsidy decreases the costs of

production for a producer, we should subtract the subsidy of $20 from the price of $80, yielding $60 as the minimum price that a producer is willing and able to produce the 1,200th unit.

• 4. The rest of the numbers for the new supply schedule can be filled in noting that every $10 change in price yields a 200 unit change in the quantity supplied.

• 5. We now have a new supply schedule which represents an increase in supply

Figure II-11.1: The Effect of a Subsidy on the Supply Curve

S0

SSUB=$20

$20

$00

$60

$80

1,200Q

P

Note that the subsidy causes an increase in supply.

Figure II-11.2: The Welfare Loss from a Subsidy to Producers

S0

SSUB=$20

D

Q

P$120

$20

$00

P0 = $70P1 = $60

P2 = $80

Q0 = 1,000 1,200 = Q1

WL

Steps for Understanding How a Subsidy to Producers Affects the Market and Causes a

Welfare Loss

• 1. Social Welfare Maximum, Original Equilibrium, P = $70, Q = 1,000

• 2. Grant a Subsidy = $20, Increase Supply• 3. New Equilibrium, P = $60, Q = 1,200• 4. Total Subsidy = (1,200)($20) = $24,000• 5. WL = $2,000 = ½ ($20)(200)

Figure II-11.3: Effect of a Producer Subsidy• Subsidy to producers results in misallocation of

resources: Too much output in subsidized Market and too little output in the Rest of Economy

Rest of Economy Market

Producer Subsidy

Resources

Output Increases

Output Decrease s

(Lower Valued Use)

Producer Subsidy in Market is equivalent to a tax on the Rest of Economy

Table II-12: The Market for Rental Housing P QD QS

0

$200 2,000 00 $300 1,800 200 PC $400 1,600 400 $500 1,400 600 $600 1,200 800 $700 1,000 1,000 $800 800 1,200 $900 600 1,400 $1,000 400 1,600 $1,100 200 1,800 $1,200 00 2,000

Figure II-12.1: The Effect of a Price Ceiling

on a Market, Part 1

$200

PC = $400

$700

$1,200

400 1,000 1,600

$1,000

D

S

Q

P

ED

Figure II-12.2: The Effect of a Price Ceiling

on a Market, Part 2

$200

PC = $400

$700

$1,200

400 1,000 1,600

$1,000

D

S

Q

P

EDPS’

CS’WL

Steps

• 1. Start with Social Welfare Maximum, P = $700 and Q = 1,000

• 2. Impose a price ceiling (PC) at $400.• 3. Suppliers decrease the number of units offered from

1,000 to 400. This is a perverse effect of price ceilings since a shortage should cause an increase in price as well as quantity supplied (the supply effect) not a decrease in quantity supplied.

• 4. The marginal consumer values the 400th unit at $1,000. (PC increase price to marginal consumer.)

• 5. PS’ = 1/2(400)($400- $200) = $40,000• 6. CS’ = 1/2(400)($1,200 - $1,000) + (400)($1,000- $400) =

$280,000• 7. WL = 1/2(1000 - 400)($1,000 - $400) = $180,000

Figure II-12.3: Effect of Rent Controls on Nearby Uncontrolled Housing Markets

D0

D1

S

Q

P

$700

1,000 2,000

$900

Table II-13: The Market for Corn P QD QS

0

$2 2,000 00 $3 1,800 200 $4 1,600 400 $5 1,400 600 $6 1,200 800 $7 1,000 1,000 $8 800 1,200 $9 600 1,400 PF $10 400 1,600 $11 200 1,800 $12 00 2,000

Figure II-13: The Effect of a Price Floor on a Market

Q

PS

D

$7

PF = $10

$12

$2

400 1,000 1,600

ES

Figure II-14: The Rationing Function of Markets

S

DQ

P

1,000

$20

$70

$120