Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
ECMC02H – Week Two Objectives: a. Finish off material from last week on price ceilings, price floors. Examine sources of inefficiency. b. The monopoly model. How does monopolist behave? What are the results? c. Inefficiency and monopoly. Natural monopoly. Dynamic efficiency vs. allocative efficiency. d. Lerner Index of market power. e. Excise tax on a monopoly 1 Consumer surplus is the net benefit to consumers from consumption. Producer surplus is the net benefit to producers from production (SR). Use loss of CS or PS to analyze economic wellbeing (i.e., economic welfare). 1. Price Ceiling E.g., rent controls Example: D: P = 60 - .1Q S: P = 11 + .04Q Equilibrium at P = $25, Q = 350 What happens if government enforces price ceiling of P = $15 2 Price $60 $50 Supply $30 $25 $15 $11 0 Demand 100 200 300 350 450 475 Quantity Per month 3 Excess Demand B and C are lost from CS and PS A is transferred from PS to CS ΔCS = +A –B (could be gain or loss) ΔPS = -A –C (loss) Δoverall economic welfare = -B –C Even this calculation assumes that it is those who value the good most who consume the reduced supply 4 2. Price floor (minimum price) (e.g., minimum wage, agricultural support price) Assume suppliers do not supply in excess. Price $60 $50 Supply $30 $25 $15 $10 0 Demand 100 200 300 5 350 450 475 Quantity Per month Excess supply B and C are lost from CS and PS A is transferred from CS to PS ΔCS = -A –B (loss) ΔPS = +A –C (could be gain or loss) Δoverall economic welfare = -B –C Even this calculation assumes that it is those who value the good most who consume the reduced supply 6 3. Price floor (but producers continue to supply perishable good) Price $60 $50 Supply $30 $25 $15 $11 0 Demand 100 200 300 7 350 450 475 Quantity Per month B and C are lost from CS and PS, but so is D (not a loss if output can be stored) Δoverall economic welfare = -B –C -D 8 4. Price floor enforced by government purchases Price $60 $50 Supply $30 $25 $15 $11 0 Demand 100 200 300 9 350 450 475 Quantity Per month No Excess Supply (all purchased) ΔCS = -A –B (loss) ΔPS = +A +B +D (gain) Wasted government resources = cost of purchases Δoverall economic welfare = +D –cost of purchases Note: assistance to farmers is A+B+D but cost of giving assistance is much higher than this. 10 5. Production quota to keep price up Price $60 $50 Supply $30 $25 $15 $11 0 Demand 100 200 300 11 350 450 475 Quantity Per month Milk Marketing Board Taxicab Medallions ΔCS = -A –B (loss) ΔPS = +A -C Δoverall economic welfare = -B -C 12 6. Pay farmers to restrict supply (keeping prices up) Price $60 $50 Supply $30 $25 $15 $11 0 Demand 100 200 300 13 350 450 475 Quantity Per month ΔCS = -A –B (loss) ΔPS = +A –C + payment to farmers Payment to farmers must be at least B + C + D Therefore ΔPS = Δoverall economic welfare = -B –C Which alternatives do producers favour? 14 The Monopoly Model Only one supplier. Entry to market is blocked. Could be: (a) cost advantage – economies of scale which are large relative to the size of the market (known as “natural monopoly” (b) government licence or restriction (patent) (c) ownership of scarce but essential resource (d) some other barrier to entry (e.g., huge advertising costs) 15 Single seller faces entire market demand curve (price maker, not price taker) Graphically: Price per unit quantity MC AC Demand MR 0 16 Quantity produced per unit of time Algebraic example Market Demand: P = 100 - .02Q So, total revenue = TR = PxQ = 100Q - .02Q2 Marginal Revenue = dTR/dQ = 100 - .04Q (the rate at which total revenue is changing as output increases) Total cost function of monopoly firm: TC = .01q2 + 10q + 432 or .01Q2 + 10Q + 432 So, MC = .02Q + 10 (the rate at which total cost is changing as output increases) AC = .01Q + 10 + 432Q-1 We can solve by forming the profit function and maximizing with respect to Q Π = TR – TC = 100Q - .02Q2 - .01Q2 + 10Q + 432 17 Or we can set MC = MR and solve for Q Substitute into the demand curve to find P* How much is the profit of the monopolist? Where is the monopolist’s supply curve? What about the long run? 18 Is the monopolist efficient? Several perspectives: Does the monopolist minimize costs? Is marginal benefit equal to marginal cost at the monopolist’s equilibrium output? 19 Does the monopolist’s output maximize the sum of producer and consumer surpluses? 20 A distributional concern (not allocative efficiency): Does the monopolist transfer potential CS into PS? 21 What about natural monopoly? What about dynamic efficiency? 22 Classic view is that monopoly distorts resource allocation and causes deadweight efficiency loss. Monopolist produces too little output (uses too few resources). In practice, there are other considerations, to judge on a case by case basis. 23