Chapter 8performance and strategy in competitive market

Competitive Market Efficiency Market Failure Role for Government Subsidy and Tax Policy Tax Incidence and Burden Price Controls Business Profit Rates Market Structure and Profit Rates Competitive Market Strategy

一 .Competitive Market Efficiency

Why is it called Perfect Competition?

Max social welfare

Welfare Economics:

the study of how the allocation of resources affects economic well-being.

Economic welfare:

consumer’ s welfare + producer’s welfare

Consumer surplus:

the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.

how much to value the good

The Demand Schedule and the Demand Curve

Price

0

Demand

1 2 3 4

$100 John’s willingness to pay

80 Paul’s willingness to pay

70 George’s willingness to pay

50 Ringo’s willingness to pay

(a) Price = $80

Price

50

70

80

0

$100

Demand

1 2 3 4 Quantity

John’s consumer surplus ($20)

The consumer surplus

The area below the demand curve and above the price.

How the Price Affects Consumer Surplus

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Consumersurplus

Quantity

(a) Consumer Surplus at Price P

Price

0

Demand

P1

Q1

B

A

C

Producer surplus

the amount a seller is paid for a good minus the seller’s cost.

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The Supply Schedule and the Supply Curve

Using the Supply Curve to Measure Producer Surplus

producer surplus

The area below the price and above the supply curve.

Figure How the Price Affects Producer Surplus

Copyright©2003 Southwestern/Thomson Learning

Producersurplus

Quantity

Producer Surplus at Price P

Price

0

Supply

B

A

C

Q1

P1

Consumer Surplus

= Value to buyers – Amount paid by buyers

and

Producer Surplus

= Amount received by sellers – Cost to sellers

Total surplus

= Consumer surplus + Producer surplus

or

Total surplus

= Value to buyers – Cost to sellers

MARKET EFFICIENCY

the property of a resource allocation of maximizing the total surplus received by all members of society.

Figure Consumer and Producer Surplus in the Market Equilibrium

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Producersurplus

Consumersurplus

Price

0 Quantity

Equilibriumprice

Equilibriumquantity

Supply

Demand

A

C

B

D

E

Figure The Efficiency of the Equilibrium Quantity

Copyright©2003 Southwestern/Thomson Learning

Quantity

Price

0

Supply

Demand

Costto

sellers

Costto

sellers

Valueto

buyers

Valueto

buyers

Value to buyers is greaterthan cost to sellers.

Value to buyers is lessthan cost to sellers.

Equilibriumquantity

Summary

Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it.

Consumer surplus measures the benefit buyers get from participating in a market.

Consumer surplus can be computed by finding the area below the demand curve and above the price.

Summary

Producer surplus equals the amount sellers receive for their goods minus their costs of production.

Producer surplus measures the benefit sellers get from participating in a market.

Producer surplus can be computed by finding the area below the price and above the supply curve.

Summary

An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient.

Policymakers are often concerned with the efficiency, as well as the equity, of economic outcomes.

Summary

The equilibrium of demand and supply maximizes the sum of consumer and producer surplus.

This is as if the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently.

Markets do not allocate resources efficiently in the presence of market failures.

二 . Deadweight Loss

Any cost suffered by consumers or producers that is not transferred, but simply lost.

Market Failure:

一 .Externality

An externality is a cost or a benefit arising from an economic transaction that falls on people who do not participate in the transaction.

Two types of externality:

**Negative externality ( spillover cost):

the adverse effect on the bystander

**Positive externality ( spillover benefit):

the beneficial effect on the bystander

Negative Externalities Automobile exhaust Cigarette smoking Barking dogs (loud pets) Loud stereos in an apartment building

Positive Externalities Immunizations Restored historic buildings Research into new technologies firework

?? Do you have any bad habits when you sleep? To grind your teeth\ to talk in your dreams

**Problems with externality:

In either situation, decision makers fail to take account of the external effects of their behavior and lead to inefficiency.

Total surplus can not be maximized.

Externality inefficient

(allocation of resources)

The rule of decision making

The basis of Private decision making: private costs and benefit.

Externality: Social cost= private cost+ external cost Social benefit= private benefit+ external benefit

0Q

D (private value)

S (private cost)

e

Qmarket

1.External cost: social cost >private cost(overallocation of resources)

Qoptimum< Qmarket: too much quantity produced

Cost of pollution

2.External benefit: social benefit>private benefit(underallocation of resources)

Qmarket<Qoptimum: too small quantity produced

Education

Conclusions

The market economy tends to over produce goods or services that have external costs and to under produce goods or services that have external benefits.

So externalities affect the allocation of resources and externalities create inefficiency

Price Controls

Price Floors Price floors→ surplus production. Aim:special interest groups

Price Ceilings

Price ceilings →cause shortages. To make housing more affordable.

P Q TR AR MR Ed

6 0

5 1

4 2

3 3

2 4

1 5

To fill in the blanks; to draw demand, MR, AR and TR curve

Your Boss during recession...

Be good, OK....

After a week…

Please, put more effort in your work ......

After a month….

I SAID “MORE EFFORT” !!!!

After a quarterly report…

Did you hear me? More effort!!!