Download 9.1 - Pearson Higher Education

Chapter 9
Applications of the
Competitive Model
9.1
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Figure 9.1 The supply and demand model
9.2
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Demand and Supply
 Increases
in demand lead to movements
along the supply curve (given an upward
sloping supply curve) to an increased
equilibrium price and quantity.
 Increases in supply lead to movements
along the demand curve (given a
downward sloping demand curve) an
increased equilibrium quantity but a
decreased equilibrium price.
9.3
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Figure 9.3 Heating cost functions
9.4
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Figure 9.4 Optimal heating in identical homes
9.5
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Figure 9.5 Optimal heating in different homes
9.6
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Figure 9.6 The economies of a quota
9.7
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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.

9.8
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Figure 9.7 The economies of rent control
9.9
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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.

9.10
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Figure 9.8 The effect of a tax on producers
9.11
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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.
9.12
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Figure 9.9 Elasticity of demand and per-unit taxes
9.13
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Figure 9.10 The effect of a tax on consumers
9.14
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Figure 9.11 The effect of a tariff on shoes
9.15
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Figure 9.12 The market for wives
9.16
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Figure 9.13 The equilibrium amount of crime
9.17
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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.

9.18
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The Economic of Crime

1.
2.
9.19
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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