Transcript Graphs and Tables, Part 3

INTRODUCTION TO
MICROECONOMICS
Graphs and Tables
Part #3
Figure VI-1.1: An Increase in Demand in an
Increasing Cost Industry
SSR
P
SLR
$20
D
Q
100K
The Market
For an increase in demand:
1. Start at PSR = PLR, Π = 0
Figure VI-1.2: An Increase in Demand in an
Increasing Cost Industry
SSR
P
SLR
$35
$20
D’
D
Q
100K 105K
The Market
For an increase in demand:
1. Start at PSR = PLR, Π = 0
2. Increase demand
3. PSR > PLR, Π > 0 causes
entry.
Figure VI-1.3: An Increase in Demand in an
Increasing Cost Industry
P
$35
$30
$20
SSR
For an increase in demand:
S’SR 1. Start at P = P , Π = 0
SR
LR
SLR 2. Increase demand
3. PSR > PLR, Π > 0 causes
entry.
D’ 4. Entry causes S to
increase.
D
5. Costs also increase and
P
decreases
until
P
=
SR
100K 105K110K Q
PLR and Π = 0 (back in
The Market
LR equilibrium).
Figure VI-1.4: Reallocation of Labor Over Time
Source: W. Michael Cox and Richard Alm, “A Better Way” Annual Report,
Federal Reserve Bank of Dallas 2003, p. 4.
Figure VI-2.1: A Decrease in Supply in an
Increasing Cost Industry with Legal Entry
Barriers
P
S’SR
SSR
For a decrease in supply:
1. Start at PSR = PLR, Π = 0
2. Short-run S decreases
producing Π > 0.
3. Entry barrier prevents S
from increasing.
SLR
$30
$20
D
Q
80K 100K
The Market
• Explanation of Figure VI-2.1
– (1) Market is in LR equilibrium/Social Welfare
Maximum
– (2) An decrease in market supply occurs because entry
barrier imposed.
– (3) Decreased supply causes an increase in the market
price which creates positive profits (P > PLR).
– (4) Positive profits would cause new entry but new
entry cannot occur because of the legal entry barriers.
These legal entry barriers create a Welfare Loss
NYC Taxi Medallions 1970-2010
Source: Why taxi medallions cost $1 million by Felix Salmon,
Reuters, October 21, 2011
Table VI-1: Statistics on US Farms, 1982
Size Group
Annual Sales # of Farms
% of Total
1
$40,000<
1,709,000
71.2%
2
$40,000$99,999
393,000
16.4%
3
$100,000+
298,000
12.4%
2,400,000
100.0%
Total
Source: USDA, Economic Indicators of the Farm Sector,
1982
Table VI-2: Statistics on US Farms, 1982
Gross
Size
Farm
Group Income
1
$27.2B
Percent
Net
Average Average
of
Farm
Net
Net
Total Income Income
Worth
16.6% -$0.9B $17,800 $131,000
2
$31.3B
19.1%
$2.2B $16,200
$482,400
3
$105.5B
64.3%
$22.7B $89,100
$1.1073M
Total
$164.0B 100.0%
$24.0B
Source: USDA, Economic Indicators of the Farm Sector, 1982
Table VI-3: Farm Production by Size Class, 2001
Type Farm
Production
Class
Farms
#
%
% of
Production
Rural Res
< $20,000
1.252M 58.0
4.6
Small Fam
$20K-$49,999
337K
15.6
4.7
Family
$50K-$99,999
202K
$100K-$249,999 199K
$250K-$499,999 89K
9.4
9.2
4.1
6.1
13.9
13.6
$500K-$999,999 49K
$1M+
31K
2.3
1.4
14.8
42.3
Large
Family
Very Large
Table VI-4: The Market for Wheat with Price
Support
P
$0.00
QDPVT
130
QDPVT + USDA
190
QS
**
$2.00
$4.00
$6.00
120
110
100
180
170
160
00
20
40
$8.00
$10.00
$12.00
PSUP $14.00
90
80
70
60
150
140
130
120
60
80
100
120
$16.00
$18.00
$20.00
50
40
30
110
100
90
140
160
180
Figure VI-4: The Market for Wheat with Price
Supports
P
$26
S
ES
PSUP = $14
DPVT + USDA
$10
DPVT
$2
Q
60
80
Consumers pay = $14(60) = $840
USDA pays = $14(120 – 60) = $840
120
Table VI-5: The Market for Wheat with Price
Supports and Production Controls (PC)
P
$0.00
QDPVT
130
QDPVT + USDA
140
QS
**
QSPC = 70
**
$2.00
$4.00
$6.00
120
110
100
130
120
110
00
20
40
00
20
40
$8.00
$10.00
$12.00
*$14.00
90
80
70
60
100
90
80
70
60
80
100
120
60
70
70
70
$16.00
$18.00
$20.00
50
40
30
60
50
40
140
160
180
70
70
70
Figure VI-5: The Market for Wheat with Price
Supports and Production Controls
SPC = 70
P
S
$26
ES
PSUP = $14
$10
DPVT + USDA
$2
DPVT
Q
60 70
80
Consumers pay $14(60) = $840
USDA pays $14(10) = $140
Table VI-6: Target Prices
P
$0.00
QDPVT
130
QS
**
PCON $2.00
$4.00
$6.00
$8.00
*120
110
100
90
00
20
40
60
$10.00
$12.00
PTAR $14.00
80
70
60
80
100
*120
$16.00
$18.00
$20.00
50
40
30
140
160
180
Steps for Finding Consumer Price, PCON
•
•
•
•
1. Find Target Price = $14
2. Find Quantity Supplied at P = $14. QS = 120.
3. Find Quantity Demanded of 120.
4. Price for QD = 120 is P = $2.
Figure VI-6: The Market for Wheat with a
Target Price
P
$26
S
PTAR = $14
$10
PCON = $2
DPVT
Q
80
120
Consumers Pay Farmers $2(120) = $240
USDA Pays Farmers ($14-$2)(120) = $1,440
Figure VI-7: The Welfare Loss in a Market for
Wheat with a Target Price
P
$26
S
PTAR = $14
$10
WL
DPVT
PCON = $2
Q
80
WL = ½(b)(h) = ½ $12(40) = $240
120
Figure VI-8a: Effect of Price Supports in the
Short-Run
P
DSR
ESSR
SSR
SLR
PSUP
P0
Short-Run Cost
To USDA
DLR
Q
Figure VI-8b: Effect of Price Supports in the LongRun
P
DSR
ESLR
PSUP
P0
SSR
S’SR
SLR
Long-Run Cost
To USDA
DLR
Q
Explanation of Figures VI-8a and 8b
• 1. Start at Social Welfare Maximum, P0 = PLR
• 2. Raise price to PSUP so that PSUP > PLR, and existing
firms will now have positive profits.
• 3. That will attract new entry (In this case, it will
mean existing farms buying up smaller farms and
adding more capacity). New entry will cause the costs
to rise (increasing cost industry) but prices do not fall
because of the price floor.
• 4. New entry continues until costs have risen enough
to reduce profits to zero. (This occurs at PSUP.)
• 5. Cost of price supports is larger in the LR than the
SR.
Figure VI-9: 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
Farm Subsidy
Rest of Economy
Resources
(Lower Valued
Use)
Output Decreases
Farm
Markets
Output Increases
Farm Subsidy in Farm Markets is equivalent to a tax
on the Rest of Economy
Table VI-9: Size of Farm and Government
Payments, 2001
Value Category
$1M+
Farms
#
%
31K
1.4
Govt Payments
$
%
$2.029B 9.8
$500K-$999,999
49K
2.3
$3.252B
15.7
$250K-$499,999
89K
4.1
$4.492B
21.7
$100K-249,999
199K
9.2
$5.123B
25.2
$50K-$99,999
202K
9.4
$2.224B
10.7
$20K-$49,999
336K
15.6
$1.436B
6.9
<$20K
1,252K
58.0
$2.081B
10.0
All Farms
2,158K
100.0
$20.727B 100.0
Figure VI-10: The Market for Corn--Supply and
Demand Curves with a Price Floor
P
S
$26.00
c
PF = $14.00
b
$10.00
$2.00
D
a
Q
100K
Table VII-1.1: Changes in Market Concentration
for Dominant Firms Over Time
Firm
Early Share Later Share
% & Year
% & Year
Standard Oil
88%
1899
67% 1909
American Sugar Refining
95% 1892
75% 1894
American Tin Plate
95% 1899
54% 1912
American Tobacco
93% 1899
76% 1903
International Harvester
85% 1902
44% 1922
Table VII-1.2: Dominant Firms and Market
Share Over Time
Firm
1962 Mkt Share 1982 Mkt Share
RCA (Color TVs)
49%
20%
Boeing (WB Jets)
51%
60%
GM (Autos)
52%
46%
GE (Generators)
59%
61%
IBM (Mainframes)
60%
68%
Kodak (Film)
85%
65%
Harley-Davidson
100%
36%
Xerox (Copiers)
100%
42%