Transcript Microeconomic Tools

Microeconomic Tools
© Copyright Allen C. Goodman, 2015
Supply and Demand
• In microeconomics, we typically have
suppliers reacting positively to price,
and demanders reacting negatively.
• The two of them combine to provide an
equilibrium, that indicates the market
quantity and the market price.
Demand for Apples
Price
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
What affects demand?
•
•
•
•
Price of the good
Prices of other goods
Consumer income
Tastes
Demand for Apples
Price
10.00
Demand with higher income
7.50
5.00
2.50
100
200
300
400
500
Apples
Supply of Apples
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
What affects supply?
• Technological change
• Input prices
• Prices of Production-Related Goods –
Examples?
• Size of the Industry
• Weather
Supply of Apples
10.00
Poor weather
7.50
Improved technology
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Supply
Demand
10.00
7.50
5.00
Total Revenue,
Total Expenditures
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Shift in Demand
Supply
Demand
10.00
7.50
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Supply
Demand
10.00
Shift in Supply
7.50
5.00
2.50
100
200
300
400
500
Apples
Equilibrium of Demand and
Supply
Shift in Demand
Demand
10.00
Supply
Shift in Supply
7.50
5.00
2.50
100
200
300
400
500
Apples
What Does Consumer Surplus Measure?
• Consumer surplus, the amount that buyers
are willing to pay for a good minus the
amount they actually pay for it, measures the
benefit that buyers receive from a good as
the buyers themselves perceive it.
How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P
Price
A
Initial
consumer
surplus
P1
P2
0
C
B
Consumer surplus
to new consumers
F
D
E
Additional consumer
surplus to initial
consumers
Q1
Demand
Q2
Quantity
Copyright©2003 Southwestern/Thomson Learning
PRODUCER SURPLUS
• Producer surplus is the amount a seller
is paid for a good minus the seller’s
cost.
• It measures the benefit to sellers
participating in a market.
• Just as consumer surplus is related to
the demand curve, producer surplus is
closely related to the supply curve.
How the Price Affects Producer Surplus
(b) Producer Surplus at Price P
Price
Supply
Additional producer
surplus to initial
producers
P2
P1
D
E
F
B
Initial
producer
surplus
C
Producer surplus
to new producers
A
0
Q1
Q2
Quantity
Copyright©2003 Southwestern/Thomson Learning
… or do
MARKET EFFICIENCY
economists just
love them
• Consumer surplus and producer surplus
may be used to address the following
question:
– Is the allocation of resources that is
determined by free markets in any way
desirable?
MARKET EFFICIENCY
CS = Value to buyers – Amount paid by buyers
and
PS = Amount received by sellers – Cost to sellers
MARKET EFFICIENCY
Total surplus
= Consumer surplus + Producer surplus
or
Total surplus
= Value to buyers – Cost to sellers
EFFICIENCY and EQUITY
• Efficiency is the property of a resource
allocation of maximizing the total surplus
received by all members of society.
• In addition to market efficiency, a social
planner might also care about equity – the
fairness of the distribution of well-being
among the various buyers and sellers.
Consumer and Producer Surplus in the Market
Equilibrium
Price A
D
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
Copyright©2003 Southwestern/Thomson Learning
MARKET EFFICIENCY
Three Insights Concerning Market
Outcomes
1. Free markets allocate the supply of goods to the
buyers who value them most highly, as
measured by their willingness to pay.
2. Free markets allocate the demand for goods to
the sellers who can produce them at least cost.
3. Free markets produce the quantity of goods that
maximizes the sum of consumer and producer
surplus.
The Efficiency of the Equilibrium Quantity
Price
Supply
Consumer
surplus
Value
Cost
to
sellers
to
buyers
Producer
Surplus
Cost
to
sellers
0
Value
to
buyers
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Efficiency is
all about
quantity!
Demand
Quantity
Value to buyers is less
than cost to sellers.
Copyright©2003 Southwestern/Thomson Learning
Using Calculus
Define
W = Total Value (ftn of Quantity) – Total
Costs (ftn of Quantity)
W = V (Q) – TC (Q)
dW/dQ = V′ – TC′ = 0
V′ is marginal benefits
TC′ is marginal costs!
So Welfare W is maximized with MB = MC.
Utility Analysis?
• In principles courses we often measure
utility -- sometimes use “utils” ...
• which is lame (like … who thinks about
“utils”).
• For several analyses in public
economics, we’ll want to use more
modern analysis ...
• Ordinal utility
Indifference Curves
2000
1500
1000
500
20
40
60
80
100
Pounds of Spam
Indifference Curves
2000
Higher level of utility
1500
1000
500
20
40
60
80
100
Pounds of Spam
How much is bought?
In a month
Housing = $1.00/sq.foot
Spam = $10/pound
Income = $1500
2000
1500
1000
500
If price of Spam doubles?
20
40
60
80
100
Pounds of Spam
Putting them together
In a month
Housing = $1.00/sq.foot
Spam = $10/pound
Income = $1500
2000
1500
1000
500
20
40
60
80
100
Pounds of Spam
Putting them together
In a month
Housing = $1.00/sq.foot
Spam = $10/pound
Income = $1500
U1
2000
U2
1500
Mkt gives
you this
1000
500
You only
need this
20
40
60
80
100
Pounds of Spam
Putting them together
2000
In a month
Housing = $0.75/sq.foot
Spam = $10/pound
Income = $1500
U increases
1500
More housing
1000
More Spam
Why?
500
20
40
60
80
100
Pounds of Spam
A close look at the tangency
In a month
Housing = $1.00/sq.foot
Spam = $10/pound
Income = $1500
2000
U2
1500
phΔh
+psΔs
1000
ΔU/Δh = - Mgl. utility of housing
ΔU/Δs =
Mgl. utility
of Spam
500
20
40
60
80
100
Pounds of Spam
A close look at the tangency
In a month
Housing = $1.00/sq.foot
Spam = $10/pound
Income = $1500
2000
phΔh + psΔs = 0
Δh/Δs = -ps/ph
Now, for utility
-MUs/Muh = (ΔU/Δs)/(ΔU/Δh)
U2
1500
= Δh/Δs
phΔh
+psΔs
1000
ΔU/Δh = - Mgl. utility of housing
ΔU/Δs =
Mgl. utility
of Spam
500
20
40
60
-ps/ph = Δh/Δs = -MUs/Muh
or
Muh /ph = MUs/ ps
MU/p = Utility/$ =
Bang for the Buck!
80
100
Pounds of Spam
Using Calculus - Utility
Utility = g [housing (h), Spam (s)]
DU = gh dh + gs ds.
On an indifference curve, DU = 0.
So:
0 = gh dh + gs ds
dh/ds = -gs/gh
Using Calculus - Income
Y = ph h + ps s
dY = ph dh + ps ds
On the budget constraint, dY = 0.
0 = ph dh + ps ds
dh/ds = -ps/ph
Using Calculus - Equilibrium
Slopes are equal
Marginal utilities
dh/ds = -gs/gh
Income trade-off
dh/ds = -ps/ph
Therefore:
-gs/gh = -ps/ph  gs/gh = ps/ph