Transcript Equilibrium, Consumer and Producer Surplus and

Market Equilibrium
S
Price
Pm
D
Qm
Quantity
At a Price Above Equilibrium
•Surplus
•Too many goods
and services
S
Price
•Qs > QD
P1
•Producers cut
price
Pm
•Qd increases
•Qs decreases
D
Qd
Qm
Qs
A surplus is where price is set above
equilibrium causing QS>QD
•Return to
equilibrium
Quantity
•Qd > Qs
At a Price Below Equilibrium
•Not enough
goods and services
S
Price
•Shortage
•Consumers bid up
price
Pm
•Qd decreases
•Qs increases
P1
D
Qs
Qm
Qd
•Return to
equilibrium
Quantity
A shortage is where the price is set below
equilibrium causing QD>QS
CONCLUSION
A market will tend toward equilibrium
If the price is not at equilibrium then
market forces will work to move the
market back toward equilibrium.
CONSUMER SURPLUS
DEFINITION:
The difference between what consumers
are willing to pay and the actual price
paid for a commodity
MEASURED BY:
The area below the demand curve
and above the price line
Consumer Surplus
S
Price
Consumer
Pm
Surplus
D
Qm
Quantity
Producer Surplus
Definition:
The difference between the revenue
received by a producer and the the cost
necessary to produce the good
Measured by: The area below the demand curve
and above the price line
Producer Surplus
S
Price
Producer
Pm
Surplus
D
Qm
Quantity
WHY IS EQUILIBRIUM BEST?
Equilibrium represents the allocatively
efficient point.
This is where Consumer Surplus and
Producer Surplus are maximised
ie benefits to consumers and producers
are at their greatest
Allocative Efficiency = A point where no one
can be made better off without making
someone worse off
WHICH IS THE ALLOCATIVELY
EFFICIENT POINT?
cars
A
100
B
60
100
200
television
Which is the allocatively efficient
point?
cars
Market for Cars
A
S
price
100
B
60
D
100
200
television
100
quantity
Which is the allocatively efficent
point?
cars
Market for Cars
A
S
price
100
B
60
D
100
200
television
100
quantity
Net Welfare Benefit
The combined values of the consumer and producer surpluses is referred to as
the net welfare benefit.
S
Net welfare
benefit.
Pm
D
Qm
Allocative Efficiency and Market Equilibrium
Markets allocate resources to the production of goods and services that satisfy
consumers needs and wants.
To be allocatively efficient a market must price and produce at equilibrium .
Price
S
1.80
Any price other than
Resources would be
$1.20
and any allocative
output
Toeither
maintain
over or
level othera market
than 400
efficiency
under allocated tomust
units
willtoresult
infreely
a
be able
move
production
and net
allocative
toloss
anyofnew
equilibrium
welfare
benefit
efficiency
would be reduced.
1.50
1.20
0.90
0.60
D
0.30
200
400
600
800
Quantity
Any changes in the market where the forces
of demand and supply are able to freely
adjust to market conditions will still result in
allocative efficiency.
A loss of Allocative Efficiency
A loss of allocative efficiency occurs when a market is not allowed to price
and produce at equilibrium this will result from :
 Price Controls(setting either a minimum or maximum price)
 Imposition of a sales tax or subsidy
 Imposition of a tariff or a quota (normally relates to internationally traded
products)
All of these regulations set by the government will result in a dead weight
loss and thus causing net social welfare to fall.
DEADWEIGHT LOSS
When a market does not achieve equilibrium
producer and consumer surplus will not be
maximised
The loss in allocative efficiency is DWL
It is measured by the loss of CS and PS not offset
by gains to other groups (eg government)
Deadweight Loss
Deadweight loss can be caused by:
• Quotas
• Price controls
• Indirect Taxes
• Subsidies
A Subsidy
S
Price
Pm
D
Qm
Quantity
A Subsidy
Subsidies reduce
costs and increase
Supply
S
Price
S+Subsidy
Pm
D
Qm
Quantity
A Subsidy
Consumers pay
the new
equilibrium price
- Pc
S
Price
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
S+Subsidy
Pm
The per unit
subsidy is
represented by the
vertical distance
between the two
supply curves
Pc
D
Qm
Q’
Quantity
A Subsidy
Producers receive
higher price -Pp
S
Price
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
The total cost to
the government is
represented by the
shaded area
S
Price
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
Original CS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
New CS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
The gain in CS
represents the
incidence of a
subsidy on
consumers
Quantity
A Subsidy
S
Price
Old PS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
A Subsidy
S
Price
New PS
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
The gain in PS
represents the
incidence of a
subsidy on
producers
Quantity
A Subsidy
S
Price
DWL
Pp
S+Subsidy
Pm
Pc
D
Qm
Q’
Quantity
An Indirect Tax – Sales Tax
S
Price
Pm
D
Qm
Quantity
An Indirect Tax
S+tax
Indirect taxes
increase costs and
shift the supply
curve to the left
S
Price
Pm
D
Qm
Quantity
An Indirect Tax
S+tax
Consumers pay
the new
equilibrium price Pc
S
Price
Pc
Pm
D
Qm
Quantity
An Indirect Tax
S+tax
The per unit tax is
measured by the
vertical distance
between the two
supply curves
S
Price
Pc
Pm
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
The producer
recieves the lower
price - Pp
S
Price
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
The government
receives the
shaded area as tax
revenue
S
Price
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
S
Price
Original CS
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
S
Price
New CS
Pc
Pm
Pp
D
Q’
Qm
The area of tax which
was previously CS
represents the
incidence of the tax on
consumers
Quantity
An Indirect Tax
S+tax
S
Price
Original PS
Pc
Pm
Pp
D
Q’
Qm
Quantity
An Indirect Tax
S+tax
S
Price
New PS
Pc
Pm
Pp
D
Q’
Qm
The area of tax which
was previously PS
represents the
incidence of the tax on
producers
Quantity
An Indirect Tax
S+tax
S
Price
DWL
Pc
Pm
Pp
D
Q’
Qm
Quantity
A Quota
S
Price
Pm
D
Qm
Quantity
A Quota
In this example
we assume there
is no domestic
production
S
Price
Pm
D
Q’
Qm
Quantity
A Quota
A quota is a limit
on the number of
imports into a
country
S
Price
Pm
The supply curve
becomes vertical
at the quota level
D
Q’
Qm
Quantity
A Quota
S’
S
Price
A quota is a limit
on the number of
imports into a
country
Pm
The supply curve
becomes vertical
at the quota level
D
Q’
Qm
Quantity
A Quota
S’
S
Price
The new price is
determined at the
intersection of
the new Supply
curve and the
original Demand
curve - P’
P’
Pm
D
Q’
Qm
Quantity
A Quota
S
Price
P’
Original CS
Pm
D
Q’
Qm
Quantity
A Quota
S
Price
P’
New CS
Pm
D
Q’
Qm
Quantity
A Quota
S
Price
P’
Old PS
Pm
D
Q’
Qm
Quantity
A Quota
S
Price
P’
New PS
Pm
D
Q’
Qm
Quantity
A Quota
S
Price
P’
DWL
Pm
D
Q’
Qm
Quantity
A Maximum Price
S
Price
Pm
D
Qm
Quantity
A Maximum Price
S
Price
A maximum
price is only
effective when
set below
equilibrium price
Pm
Pmax
D
Qm
Quantity
A Maximum Price
•Qs decreases
S
Price
•Although
consumers would
like to buy more
producers only
supply Qs
Pm
•There is a
shortage
Pmax
D
Qs
Qm
Qd
Quantity
A Maximum Price
S
Price
Original CS
Pm
Pmax
D
Qs
Qm
Quantity
A Maximum Price
S
Price
New CS
Pm
Pmax
D
Qs
Qm
Quantity
A Maximum Price
S
Price
Original PS
Pm
Pmax
D
Qs
Qm
Quantity
A Maximum Price
S
Price
New PS
Pm
Pmax
D
Qs
Qm
Quantity
A Maximum Price
S
Price
DWL
Pm
Pmax
D
Qs
Qm
Quantity
A Minimum Price
S
Price
Pm
D
Qm
Quantity
A Minimum Price
S
Price
A minimum price
is only effective
when set above
equilibrium price
Pmin
Pm
D
Qm
Quantity
A Minimum Price
S
Price
•Qd decreases
•Although
producers would
like to sell more
they are unable to
at this high price
Pmin
Pm
D
Qd
Qm
Quantity
A Minimum Price
S
Price
Pmin
Original CS
Pm
D
Qd
Qm
Quantity
A Minimum Price
S
Price
Pmin
New CS
Pm
D
Qd
Qm
Quantity
A Minimum Price
S
Price
Pmin
Original PS
Pm
D
Qd
Qm
Quantity
A Minimum Price
S
Price
Pmin
New PS
Pm
D
Qd
Qm
Quantity
A Minimum Price
S
Price
Pmin
DWL
Pm
D
Qd
Qm
Quantity
Net Welfare Benefit
The combined values of the consumer and producer surpluses is referred to as
the net welfare benefit.
S
Net welfare
benefit.
Pm
D
Qm
Allocative Efficiency and Market Equilibrium
Markets allocate resources to the production of goods and services that satisfy
consumers needs and wants.
To be allocatively efficient a market must price and produce at equilibrium .
Price
S
1.80
Any price other than
Resources would be
$1.20
and any allocative
output
Toeither
maintain
over or
level othera market
than 400
efficiency
under allocated tomust
units
willtoresult
infreely
a
be able
move
production
and net
allocative
toloss
anyofnew
equilibrium
welfare
benefit
efficiency
would be reduced.
1.50
1.20
0.90
0.60
D
0.30
200
400
600
800
Quantity
Any changes in the market where the forces
of demand and supply are able to freely
adjust to market conditions will still result in
allocative efficiency.
A loss of Allocative Efficiency
A loss of allocative efficiency occurs when a market is not allowed to price
and produce at equilibrium this will result from :
 Price Controls(setting either a minimum or maximum price)
 Imposition of a sales tax or subsidy
 Imposition of a tariff or a quota (normally relates to internationally traded
products)
All of these regulations set by the government will result in a dead weight
loss and thus causing net social welfare to fall.