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Chapter 9
Applications of the
Competitive Model
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Figure 9.1 The supply and demand model
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Demand and Supply
 Increases
in demand lead to movements
along the supply curve and (given an
upward sloping supply curve) to an
increased equilibrium price and quantity.
 Increases in supply lead to movements
along the demand curve and (given a
downward sloping demand curve) an
increased equilibrium quantity but a
decreased equilibrium price.
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Figure 9.3 Heating cost functions
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Figure 9.4 Optimal heating in identical homes
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Figure 9.5 Optimal heating in different homes
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Figure 9.6 The economics of a quota
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From Figure 9.6
An effective quota reduces the quantity
supplied and raises the price to consumers.
 The quota allows the farmers to earn
economic rent, (a return above the
opportunity cost).
 The value of the quota increases the costs of
entering the industry and when a quota is sold
to another farmer, the value is transferred
completely to the original farmer. This is called
the transitional gains trap.

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Figure 9.7 The economics of rent control
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Potential Effects of Rent Control
Tenants who occupy apartments when rent
control is established will benefit.
 All landlords will be worse off and some will be
induced to reduce supply.
 As a result of reduced supply, some renters
are worse off.
 The way available apartments are allocated
imposes costs on suppliers and renters and
the allocation is not Pareto-optimal.

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Figure 9.8 The effect of a tax on producers
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From Figure 9.8
A
per-unit tax increases the equilibrium
price by less than the tax.
 The tax creates a deadweight loss as it
reduces consumer and producer surplus.
 The amount of the tax paid by consumers
and producers depends upon the relative
elasticities of demand and supply.
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Figure 9.9 Elasticity of demand and per-unit taxes
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Figure 9.10 The effect of a tax on consumers
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Figure 9.11 The effect of a tariff on shoes
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Figure 9.12 The market for wives
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Figure 9.13 The equilibrium amount of crime
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From Figure 9.13
The demand curve for crime shows the
declining marginal benefits of a crime as
function of the number of crimes.
 The supply curve of crime slopes upwards,
showing rising marginal costs. A major cost
being foregone income from legitimate
employment (persons with low alternative
earnings are the first to turn to crime).
 In equilibrium, the quantity of crime is where
the marginal benefits and marginal costs meet.

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The Economic of Crime

1.
2.
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The model suggests two methods to
reduce crime:
Reduce the net benefits of crime
(impose stiffer penalties and
increase law enforcement).
Raise the opportunity cost (increase
job opportunities and raise social
safety nets).
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