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SupplyClaudia Garcia-Szekely
© 2
00
0 C
lau
dia
Garc
ia-S
zeke
ly
1
In a Perfectly Competitive Market
There are so many buyers that no buyer has the power to affect the price.
We say thatBuyers are
price takers.Buyers “react” to
prices
In a Perfectly Competitive Market
There are so many producers that no producer has the power to affect the price.
3
We say thatProducers are
price takers too!Producers also “react” to prices
Seeds
Irrigation
Fertilizer
Workers
5
Cost of Production
$3.25
3
$2.75
$2.25
$1.75
$1.50
4210
Quantity
Quantity Supplied
If Price =
Produce=
If Price ~
Cost
If Price ~
1 2
If Price ~
33 4210Produce=
PriceSupply
$1.75
$2.25
6
Increase in Costs
$3.25
3
$2.75
$2.25
$1.75
$1.50
4210
Quantity
Old Quantity Supplied
If Price ~
Produce=
If Price ~
Cost
If Price ~
01
If Price ~
20
Price
If Price ~
3
New Quantity Supplied
Supply DecreaseSupply Shifts UP/Left
7
Price
Q0Q1
An increase in Costs,Causes a Leftward shift in
Supply
S0
S1 Supply DecreaseSupply Shifts UP/Left
8
Price
Q0Q1
Bad weather, insect infestation, etc.,Causes a Leftward shift in Supply
S0
S1
Weather, Insects, Natural Disasters
Supply DecreaseSupply Shifts UP/Left
More output can be produced from the same amount of inputs
9
Price
Q0 Q1
An improvement in technologyCauses a Rightward shift in SupplyS1
S0
Technology
Supply IncreaseSupply Shifts DOWN/Right
Expectations
10
Price
Q0Q1
Expectation of higher prices in the future,Causes a Leftward shift in Supply TODAY
Producers prefer to wait and sell their production in the future, when prices will be higher.
S0
S1
Prices of other goodsSubstitutes in production – goods for which producing more of one implies producing less of the other.
o Different crops: opium and rubber, tea and other crops.
o Pork can be used to produce bacon or sausage.
Complements in production – goods that are produced together.
o Beef and leather.o Corn and Ethanol fuel, Ethanol fuel cells for
electricity, rocket fuel, Alcoholic beverages, Feedstock, Antiseptic, Antidote 11
The Law of Supply
True ONLY if the cost of production, weather, Technology, Prices of related goods and Expectations remain the same
12
PriceSupply
Th
e h
igh
er
the p
r ic e
The more units will be brought for sale
Ceteris
Paribus
13
Quantity Supplied
The number of units a firm would be willing and able to offer for sale at a given price.
PriceSupply
Is a point on the Supply line
Is a point on the Supply line
Is different for each price
Is different for each price
Movement alongPrice changes
14
SupplyPrice
Supply
Is the entire Supply lineIs the entire Supply line
The The complete complete set set of price and of price and quantity supplied quantity supplied for a firm.for a firm.
Shifts
Changes in cost of production, weather, Technology, Prices of related goods and Expectations
Changes in cost of production, weather, Technology, Prices of related goods and Expectations
Cost TechnologyWeatherExpectationsPrices of other goods
15
Increase in quantity supplied
Increase in supply
Decrease in supply
Decrease in quantity supplied
he
f
g
Price Changes: Movement AlongSupply Shifts
The Market Supply
16
1
3
2
10 30 50 100 200 30 50 10020
90 170 330
1
3
2
Is the sum of the quantities supplied by all the firms in the market
Is the horizontal sum of the individual firms’ supply curves.
17
Market Supply
100
80
120
?
60
? ? ?
Cost TechnologyWeatherExpectationsPrices of other goods
18
Increase in quantity supplied
Increase in supply
Decrease in supply
Decrease in quantity supplied
he
f
g
Supply Shifts
Number of Producers
Price Changes: Move Along
Prices of related goods
IncomesNumber of
consumers in the market.
Tastes and Preferences
Expectations
Demand ShiftsIncrease in demand
Increase in quantity demanded
Decrease in quantity demanded
Decrease in demand
a
d
c
b
Who is affected first, buyers or sellers?1. Increase in cost of production2. Increase in incomes3. Imposition of a tax on
producers4. Producers expect an increase
in price.5. Fear of unemployment
SellersSellers
SellersSellers
SellersSellers
BuyersBuyers
BuyersBuyers
6. A frost (bad weather)7. Increase in the number of
buyers8. Fear of contaminated
product9. A new technology which
increases productivity.10.Increase in price
SellersSellers
SellersSellers
SellersSellers
BuyersBuyers
BuyersBuyers
BuyersBuyers
a
d
c
b
he
f
g
a. Increase in demand
b. Increase in quantity demanded
c. Decrease in quantity demanded
d. Decrease in demand
e. Increase in quantity supplied
f. Increase in supply
g. Decrease in supply
h. Decrease in quantity supplied
23
1. High prices of grain have increased costs for dairy farmers and beef producers. How would this affect the market for beef and milk?
The effect of this event would best be represented by arrow ______ which shows (an increase/a decrease) _______in (Demand/Quantity Demanded/ Supply/Quantity Supplied) __________________. This change was caused by a change in (price/incomes/tastes and preferences/number of consumers/cost, environmental conditions, prices of other goods, expectations, technology)____________
24
2. A sharp increase in the price of beef leads many consumers to switch from beef to chicken. How will this affect the market for chicken in these countries?
The effect of this event would best be represented by arrow ______ which shows (an increase/a decrease) _______in (Demand/Quantity Demanded/ Supply/Quantity Supplied) __________________. This change was caused by a change in (price/incomes/tastes and preferences/number of consumers/cost, environmental conditions, prices of other goods, expectations, technology)____________
25
3. The price of oil falls. How would this affect the freight and shipping industry?
The effect of this event would best be represented by arrow ______ which shows (an increase/a decrease) _______in (Demand/Quantity Demanded/ Supply/Quantity Supplied) __________________. This change was caused by a change in (price/incomes/tastes and preferences/number of consumers/cost, environmental conditions, prices of other goods, expectations, technology)____________
26
4. The price of coffee decreases to record low levels. How would this drop in coffee prices affect the market for coffee?
The effect of this event would best be represented by arrow ______ which shows (an increase/a decrease) _______in (Demand/Quantity Demanded/ Supply/Quantity Supplied) __________________. This change was caused by a change in (price/incomes/tastes and preferences/number of consumers/cost, environmental conditions, prices of other goods, expectations, technology)____________
27
5. Farmers can easily switch from growing coffee to growing Coca. The price of coffee decreases to record low levels. How would this drop in coffee prices affect the market for coca?
The effect of this event would best be represented by arrow ______ which shows (an increase/a decrease) _______in (Demand/Quantity Demanded/ Supply/Quantity Supplied) __________________. This change was caused by a change in (price/incomes/tastes and preferences/number of consumers/cost, environmental conditions, prices of other goods, expectations, technology)____________
28
6. A successful “buy American” campaign shifts consumers’ preferences towards clothes made in America. How would this affect the garment industry in the U.S.?
The effect of this event would best be represented by arrow ______ which shows (an increase/a decrease) _______in (Demand/Quantity Demanded/ Supply/Quantity Supplied) __________________. This change was caused by a change in (price/incomes/tastes and preferences/number of consumers/cost, environmental conditions, prices of other goods, expectations, technology)____________
29
Consider the market for Soybeans
P
0
Want to buy
Want to sell
35
$3.50
4525
$1.50
$2.50 EQUILIBRIUMEQUILIBRIUM
Excess Demand
Excess Supply
25 45
Demand
Supply
A Shortage
30
Pri
ce
Pri
ce
QuantityDemanded
QuantitySupplied
Supply
DemandShortage
Po
5030
20
Shortages occur because the price
is “too” low
The Effect of a Shortage
QuantityDemanded
QuantitySupplied
S
DPo
Shortage
P1
Q Supplied=Q demanded
Q demanded decreases
Q supplied increases
Shortage eliminated
shortage causes a
price increase
90
Q Supplied=Q demanded1206030
Qd drops from 120 units to 60
units: by 60 units
Qs increases from 30
units to 60 units: by 30
units
-60+30
A Surplus
32
Pri
ce
Pri
ce
QuantityDemanded
QuantitySupplied
Supply
DemandSurplus
Po A surplus occurs because the price
is “too” high
The Effect of a Surplus
33QuantityDemanded
QuantitySupplied
Supply
Demand
Po Surplus
P1
Surpluscause
a price drop
Q Supplied=Q demanded
Q demanded increases
Q supplied
decreases
Surplus eliminated
Market Equilibrium
When the quantity firms want to sell is equal to quantity consumers want to purchase.
At equilibrium, there is no reason for the market price to change.
34
35
D
S
300
40
280
320
340
10
260
80
1. Identify the equilibrium price and quantity: Price=_____;Quantity = ___
2. If the price is $280 is the market in equilibrium?
3. Will there be a surplus or a shortage?
4. If so, what is the size of the surplus or shortage?
5. What do you expect will happen to the price?
6. What price do you predict for this market?
7. If the price is $320 is the market in equilibrium?
8. Will there be a surplus or a shortage?
9. If so, what is the size of the surplus or shortage?
10. What do you expect will happen to the price?
11. What price do you predict for this market?
DA
$3.50
$1.50
4 8 Qd 3
$1.50
$3.50DB
Qd
P
$1.50
$3.50DC
94 Qd
0
P
$3.50
$1.50
8Qd
Market Demand = Horizontal Sum of Individual Demands
PP
From the Individual demand curves to Market demand:
0
20
37
Market Demand
100
80
120
140
? ? ? ?
1.Fill in the values for the Market Supply and the Market Demand 2.Find the equilibrium price and quantity: Price = ______;Quantity = _____ 3.If the price is $200 is the market in equilibrium? 4.Will there be a surplus or a shortage? 5.If so, what is the size of the surplus or shortage? 6.Given your answer to the previous question, will you expect the price to increase or decrease?7.What price do you predict for this market
A&E's Supply of
good X
Bob's Supply of
good X
Rose Inc. Supply of
good XMarket Supply
Kyle's Demand
for good X
Ann's Demand
for good X
Jason's Demand
for good X
Mark's Demand
for good XMarket
DemandPrice of X
120 0 0 0 100 35 25 20 160 20 10 10 95 30 20 15 200 30 20 30 90 25 15 10 240 60 25 35 85 20 10 5 280 80 35 45 75 17 5 3 320 95 40 65 65 10 3 2
39
A&E's
Supply of
good X
Bob's Supply of
good X
Rose Inc. Supply of
good X Market
Supply
Kyle's Demand for good
X
Ann's Demand for good
X
Jason's Demand for good
X
Mark's Demand for good
X Market
Demand Price of X 120 0 0 0 0 100 35 25 20 180160 20 10 10 40 95 30 20 15 160200 30 20 30 80 90 25 15 10 140240 60 25 35 120 85 20 10 5 120280 80 35 45 160 75 17 5 3 100320 95 40 65 200 65 10 3 2 80
40
A&E's
Supply of
good X
Bob's Supply of
good X
Rose Inc. Supply of
good X Market
Supply
Kyle's Demand for good
X
Ann's Demand for good
X
Jason's Demand for good
X
Mark's Demand for good
X Market
Demand Price of X 120 0 0 0 0 100 35 25 20 180160 20 10 10 40 95 30 20 15 160200 30 20 30 80 90 25 15 10 140240 60 25 35 120 85 20 10 5 120280 80 35 45 160 75 17 5 3 100320 95 40 65 200 65 10 3 2 801.If the price is $280 is the market in equilibrium? 2.Will there be a surplus or a shortage? 3.If so, what is the size of the surplus or shortage? 4.Given your answer to the previous question, will you expect the price to increase or decrease?. In one or two sentences explain why?
When P = $280:Quantity Supplied =160 Quantity Demanded = 100
Surplus = 60 units
41
D
S
100
1200
80
120
600 1800
1.Find the equilibrium price and quantity: Price = ______;Quantity = _____ 2.If the price is $80 is the market in equilibrium? 3.Will there be a surplus or a shortage? 4.If so, what is the size of the surplus or shortage? 5.Given your answer to the previous question, will you expect the price to increase or decrease?. In one or two sentences explain why?
42
D
S
100
1200
80
120
600 1800
D
S
180
1000
120
240
500 1500
1. Equilibrium Price = ______; Equilibrium Quantity = _____ 2. If the price is $120 is the market in equilibrium? 3. Will there be a surplus or a shortage? 4. If so, what is the size of the surplus or shortage? 5. Given your answer to the previous question, will you expect the price to
increase or decrease?6. What price do you predict for this market?
Fig A Fig B
43
Consider the market for Coca.
Price
0 quantity
D
S
P0
Q0
What will happen to the equilibrium price and quantity?
Government fumigates
Colombian coca fields
Who is affected first?
0
D0
S0
P0
Q0
Supply shifts left
P1
Q1
ShortageA shortage appears
due to drop in supplyPrice increases due
to shortageQuantity exchanged
decrease
S Pe Qe
S1
A decrease in Supply (Shift) and a decrease in quantity
demanded (Move up along)
A decrease in Supply (Shift) and a decrease in quantity
demanded (Move up along)
Increase? Decrease?Shift or move along?
45
D
S
P0
The U.S. Government
puts into effect a campaign to
reduce consumption
Q0
Consider the market for Coca
0
S
Q0
Demand shifts left
A surplus appears
Price decreases
D Pe QeSurplus
D1D0D0
A decrease in Demand andA decrease in Demand and
Q1
P0
P1
Who is affected first?Increase? Decrease?Shift or move along?
A decrease in Quantity Supplied
A decrease in Quantity Supplied
Quantity exchanged decreases
47
Consider the market for coffee.
D
S
P0
Q0
Unusually good
weather increases the size of the crop
48
Unusually Good Weather
0
S0
P0
Q1
Supply shifts right
P1
A surplus appears
Price decreases
Quantity exchanged increases
S Pe Qe
Q0
D0
S1Surplus
An increase in Supply and an increase in quantity demanded
An increase in Supply and an increase in quantity demanded
49
Consider the market for corn.
D
S
P0
Q0
An increase in production of
Ethanol (which is made from
corn)
Increase Demand for corn
SP1
Q0
Demand shifts right
P0A shortage appears
Price increases
Quantity exchanged increases
D Pe Qe
Q1
Shortage
D1D0D0
An increase in Demand and an increase in quantity suppliedAn increase in Demand and an increase in quantity supplied
What caused the following
1. Quantity drops and price drops
2. Quantity increases and price drops
3. Quantity drops and price increases
4. Quantity increase and price increases
51
For each of the following events, draw a supply and demand diagram. Your graph must include:
1. Shifts in supply and/or demand if any2. Identify surplus or a shortage (if any) in your
graph. 3. Old and new equilibrium price/quantity.4. Your graph must be properly labeled. Showing
clearly the original equilibrium and the new equilibrium.
53
1. A sharp increase in the price of beef leads many consumers to switch from beef to chicken.
2. A bumper grain crop cuts the cost of chicken feed in half.
3. Extraordinary cold weather destroys a significant number of chickens
4. A sudden interest in Eastern religions converts many chicken eaters to vegetarians.
5. Increases in income and population.
54
• New wave of diets low in carbohydrates affects orange juice sales. Market: Orange Juice.
• Insect infestation destroys citrus crops. Market: Orange Juice.
• News report widespread contamination of fish with toxic mercury. Market: Fish
• Acid rain has caused fish populations to disappear. Market: Fish
55
Use Supply and Demand to Explain:
• Why do roses cost more on Valentine’s day than during the rest of the year?
• World food prices see dramatic rise?• Why do hotels in Phoenix cost more in
February than in August?• Gasoline prices climb toward $4. • Why are jeans more expensive today than in
the 1950’s?• Why are computers cheaper today than in
the 1980’s?56
0
S0
P0
Q1
P1
Q0
D0
S1Surplus
0
S0P1
Q0
P0
Q1
Shortage
D1D0
S P Q
D P QEffect on price is
indeterminate
Quantity increases
P? Q
Surp
lus
Shor
tage
58
D0
D P QP? Q
0
D
S
P0
Q0
P1
Q1
Shortage
Effect on price is
indeterminate
S P Q
0
S
P1
Q0
P0
Q1
Surplus
D1
Quantity decreases
Surp
lus
Shor
tage
590
S0
P0
Q1
P1
Q0
D0
S1Surplus
D0
D P QQ?P
0
S
P1
Q0
P0
Q1
Surplus
D1
S P Q
Effect on quantity is
indeterminate
Price decreases
Surp
lus
Surp
lus
60
D
S
P0
Q0
P1
Q1
Shortage
S P QS0
P1
Q0
P0
Q1
Shortage
D1
D P Q
Price increases
P
Effect on quantity is
indeterminate
Q?Sh
orta
ge
Shor
tage
61
In two separate graphs, show the effect of these two events. In each graph, show the following:
1. Changes in supply and/or demand if any
2. Whether the shift causes a surplus or a shortage? Identify the surplus/shortage in your graph.
3. Effect of the surplus/shortage on equilibrium price
4. Effect on equilibrium quantity.
Put these effects together and write your answer.
Remember your graphs must be properly labeled. Showing clearly the original situation and the new situation.
62
1. A sharp increase in the price of beef leads many consumers to switch from beef to chicken. High prices of grain have increased the costs of raising chickens. How would this affect the market for chicken?
2. ``Alaska is awash in salmon. Huge fish runs have been building here, adding to the growing output from sources like Chilean fish farms and Russian fishing fleets.'' News report warns consumers of possible salmon contamination: “Widespread contamination of salmon with toxic mercury cast a shadow over the nutritional benefits of fish.” How would this affect the market for salmon?
3. New legislation decreasing the minimum wage comes into effect. A successful “buy American” campaign shifts consumers’ preferences towards clothes made in America. How would this affect the garment industry in the U.S.?
4. A two-day freeze over the weekend devastated the Florida citrus crop. Growers in the state are expecting their smallest crop ever. The new wave of diets low in carbohydrates has reduced consumption of orange juice. How would this affect the market for oranges?
• The price of corn syrup, used in the production of soft drinks, tripled. At the same time, concern with childhood obesity, prompted schools to remove soft drinks from school lunches. Market: soft drinks
• Frustrated by the cost and ineffectiveness of the war on drugs, the U.S. government is considering "decriminalization" of both the use and sale of cocaine. Market: cocaine
• An increase in the number of nursing homes and community health centers and the expansion of home care. At the same time, improving opportunities for women in business. Market: Nurses.
• Grapes can be used to produce wine or raisins. A decrease in the price of wine and a decrease in the price of candy (a substitute for raisins). Market: raisins
63
64
2
$10
$1
10
D
1
$11
If the price is $11 the consumer would buy one unitIf the price is $10 the consumer would buy TWO units
If the price is $1 the consumer would buy 10 units
Unit 1 is worth at least $11 to consumer
Unit 2 is worth at least $10 to consumer
Unit 10th is worth at least $1 to consumer
65
2
$10
$1
10
D
1
$11
Unit 1 is worth at
least $11 to
consumer
Unit 2 is worth at
least $10 to
consumer
Unit 10th is
worth at least $1
to consumer
Market Demand: Value to Consumers The distance to
the Demand curve
Value consumers place on that unit
66
Cost of Production
$3.25
3
$2.75
$2.25
$1.75
4210
Quantity Supplied
If Price < 1.75
Produce=
If Price ~
Cost
If Price ~
1 2
If Price ~
33 4210Produce=
Price
Supply
$1.75
$2.25
The distance to the Supply curve tells us how much it costs to produce each unit.
Supply: Cost of bringing a good to the market
100th 1000th
S (cost)
Cost $10$10
$1Cost $1
100th unit is worth
$10 to consumer
D (Value given by consumer)
1000th unit is worth $1 to consumer
Optimum Output Level
S (cost)
Optimum Output Level
Equilibrium Quantity
Produce all units the consumer values enough to pay the cost of bringing them to market
Produce all units the consumer values enough to pay the cost of bringing them to market
Value to consumer
Cost
Cost
Value to consumer Greater than Cost
Cost Greater than Value to consumer
PRODUCER AND CONSUMER SURPLUS
Ch. 5 (pp. 94-96)
69
Willingness to Pay
D
1
10
Will
ingn
ess
to p
ay
2 3
8
6
$10 for one unit
$8 for the second unit
$6 for the third unit
$24$24
Long Distance Service
71
D
60
0.55
120 180
0.45
0.35
Consumer Surplus = 81
– 63= 18
If the price is $0.3560
*0.5
5=$3
3
60*0
.45=
$27
60*0
.35=
$21
$81Consumer Actually
pays $0.35 x 180 = $63
Minutes
Consumer Surplus
72
D
Will
ingn
ess
to p
ay
1 Minute intervals180 minutes
Consumer actually pays =
0.35*180
Consumer surplus
If the price is $0.35
The area below the demand curve and above the price the consumer pays
Consumer surplus = Area
of triangle
Consumer surplus in a Perfectly Competitive market:
D
Units of output, Q
Supply = Cost
Q = 4000
Consumer Surplus
5
The area below the demand curve and above the price the consumer
pays
Producer Surplus
74
S = Cost
2
4
6
1 2 3
If The market price is $6
Producer Surplus = 18 – 12 = 6
Cost=12
TR = $6*3=$18
PS = 6The area above the supply curve and below the price the producer receives
~ Profit
Producer Surplus under Perfect Competition
D
Supply = Cost
4000
C S
P SPS
10
5
2
The area above the supply curve and below the price the producer
receives
Consumer surplus in a Perfectly Competitive market:
76
D
Supply = Cost
Q = 4000
CS = Triangle Area
10
5
2
Triangle Area = Base x Height x ½Triangle Area = 4000 x (10-5) x 1/2
Producer Surplus under Perfect Competition
77D
Supply/Cost
4000
PS = Triangle Area
10
5
2
Triangle Area = Base x Height x ½Triangle Area = 4000 x (5-2) x 1/2
Perfect Competition
D
Q
Supply/Cost
Qe=4000
C S
P S
10
5
2
D
S
11
21.5
25
4
5 20 50
Calculate Consumer and Producer Surplus at Equilibrium
5.75
8012
3456
10
789
10
20 30 40 50 60 70 80 90 100
Calculate Consumer and Producer Surplus at Equilibrium
When the market is not allowed to clear
D
Q
S
1,000
C S
P S
Qd =5000Qs =1000 3,000
2,000Can’t
charge more than
$1,000Price Ceiling
All
thes
e pr
ices
ar
e pr
ohib
ited
Prevents price from reaching equilibrium
Shortage
Price Ceiling: Consumers May Win or Lose
D
S
600
3,900
2,200
CS at equilibrium
300
Gain to consumerLoss to Consumer7,300
1000
900
CS: Area below Demand
Above Price
CS: Area below Demand
Above Price
Price Ceiling: Producers Lose
D
SLoss to Producer
3,900
2,200
600300
1000
7,300
900
PS: Area below Price
Above Supply
PS: Area below Price
Above Supply
A subsidy to Consumers and a Tax to Producers
Loss to Producer
D
S
600
3,900
2,200
300
Gain to consumer
D
S
600
3,900
2,200
300
CSCS
TaxSubsidy
Welfare Loss
Quantity Bought/Sold
Price Ceiling
85
D
Q
$
S
P=$2
4000
C S
P S$1
2000
Price Ceiling
86
D
Q
S
$6
40
C S
P S$4
$8
$10
20
$2
When the market is not allowed to clear
D
Q
S
8 C S
P S
Qd =20,000 Qs =60,00040,000
4
Must pay at least Price Floor
Prevents price from reaching equilibrium
4
All
thes
e pr
ices
ar
e pr
ohib
ited
Surplus
Surplus
Price Floor: Consumers Lose
88
D
S
4
2
2
3Loss to Consumer
6
Price Floor: Producers May Win or Lose
D
S
4
2
2
3Loss to Producer
Gain to Producer
6
PS: Area below Price
Above Supply
PS: Area below Price
Above Supply
A subsidy to Producers and a Tax to Consumers
D
S
4
2
CS
2
3 CS
PS
D
S
4
2
2
3
Loss to Consumer
Gain to ProducerGain to
Producer
SubsidyTaxTax
Loss of Surplus to Society
91
D
S
4
2CS
2
3 CS
PS
D
S
4
2
2
3
PS
Loss to Consumer
Loss to Producer
Quantity Bought/Sold
Welfare Loss from Price Floor
92
D
Q
$
S
P=$2
4
$5C S
P S
P SP S
Welfare Loss from Price Floor
93
D
Q
S
50
$8C S
$4
$6
$10
30
$2
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
94
Government imposes a Price Ceiling at $6 Calculate: CS,PS and WL.
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
95
Government imposes a Price Ceiling at $6 Calculate: CS,PS and WL.
CS
PS
WL
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
96
OldPS
NewCS
New PS
Subsidy to ConsumerSubsidy to ConsumerTax to ProducerTax to Producer
WLWL
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
97
Government imposes a Price Floor at $12 Calculate: CS,PS and WL.
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
98
Government imposes a Price Floor at $12 Calculate: CS,PS and WL.
CS
PS WL
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
99
PS (12-6)*16 (12-6)*16
(6-2)*16*(1/2)
12-6)*(24-16)*(1/2)
(20-12)*16*(1/2)
©2
00
1,2
00
2C
lau
dia
Garc
ia-
Sze
kely
100
Old CS
Old CS
New CSNew CS
WLWLNewPS
Subsidy to Producer
Subsidy to Producer
Tax to Consumer
Tax to Consumer
D
S
12
200
11
13
14
100
10
300
Government imposes a Price Floor at $13: Qs = ___ Qd = _____Government imposes a Price Floor at $11: Qs = ___ Qd = _____Government imposes a Price Ceiling at $13: Qs = ___ Qd = _____Government imposes a Price Ceiling at $11: Qs = ___ Qd = _____
Equilibrium Price= ____Qs = ____ Qd = _____
Consumer Surplus= Producer Surplus= Welfare Loss= Tax to: Subsidy to: Tax/Subsidy =
103D
S
30
100
20
40
50
50
10
150
Calculate Consumer and Producer Surplus and welfare loss:1. At equilibrium2. When the government imposes a price floor at $40. This floor is equivalent to a tax on
_____and a subsidy to _________ the size of this tax/subsidy is equal to __________3. When the government imposes a price ceiling at $20. This ceiling is equivalent to a tax
on _____and a subsidy to _________ the size of this tax/subsidy is equal to _________
Figure 1
104D
S
15
1000
10
20
25
500
5
1500
Figure 2
Calculate Consumer and Producer Surplus and welfare loss:1. At equilibrium2. When the government imposes a price floor at $10. This floor is equivalent to a tax on
_____and a subsidy to _________ the size of this tax/subsidy is equal to __________3. When the government imposes a price ceiling at $10. This ceiling is equivalent to a tax
on _____and a subsidy to _________ the size of this tax/subsidy is equal to _________
105D
S
15
1000
10
20
25
500
5
1500
Figure 2
Calculate Consumer and Producer Surplus and welfare loss:1. At equilibrium2. When the government imposes a price ceiling at $10. This floor is equivalent to a tax on
_____and a subsidy to _________ the size of this tax/subsidy is equal to __________3. When the government imposes a price ceiling at $10. This ceiling is equivalent to a tax
on _____and a subsidy to _________ the size of this tax/subsidy is equal to _________