government policies & efficiency econ 1 chapters 7,6
TRANSCRIPT
Government Policies & Efficiency
Econ 1
Chapters 7,6
Periods of AnalysisPeriods of Analysis
• Long-Run: All inputs are variable (prospective)
• Short-Run: Some inputs fixed, some variable
• Market Period: All inputs Fixed Output Fixed ( vertical supply)
Market Analysis
• The Market for Rental apartments
• Analyze an increase in demand
• Analyze price effects in the market period
• Analyze supply and price effects in the long-run
$ Rent
Units/Month
SupplySupply
D0
$ 800DD11
1000 1500
$ 1000
LR new SupplyLR new Supply
$ 880
New LR Equilibrium
$ Rent
Units/Month
SupplySupply
D0
$ 800
DD11
1000 1500
Price Ceiling
Short
Implications Price Ceiling below Equilibrium
• Increased Transaction Costs to Buyers & Sellers
• Increase in Non-Market rationing: Discrimination
• Decrease in Quality
• Decrease in Supply
Price Floor above Equilibrium
• How does the labor Market work?
• What happens when you place the Minimum Wage above Equilibrium wage ?
$ Wage
Qty/T
Demand Supply of Labor
Wage E
QE
Min. Wage
Qd Qs
SurplusSurplus
The Minimum Wage: A Price Floor
$Wage
QTY / T
D
S
Pe
Qd Qs
D
Qe
Minimum Wage
Implications of Price Floor above Equilibrium
• Increase in transaction costs
• Increase in non-market rationing (discrimination)
• Increase in quality (not demand driven)
• Increase in supply
• Wealth transfer: from unemployed to employed
ECON 1
Market Efficiency
Chapter 7
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Supply
Demand
Dx
Market Interaction
Pe
Qe
Exchange Value
Allocation Efficiency: Price allocates the goods to highest valued users
A B C Market
$ P $ P $ P
$ P
Q/T
D D
D
Qa Qb Qc Qe
Pe Pe
Marginal Value A = Marginal Value B = Marginal Value C = Market Price
DemandSupply
Market Demand determines Price. Each buyer responds to price by buying till Marginal Value equals price. No reallocation can generate greater value.
Production Efficiency: Price coordinates the efficient use or resources
Firm 2Firm 1 Firm 3Market$ P
$ P $ P $ P
Q/T
Demand
S1
S2
Qe Q1 Q2 Q3
Pe Pe
Market Price = Marginal Cost Firm 1 = Marginal Cost Firm 2 = Marginal Cost Firm 3
Supply
S3
Market Supply is the sum of the industry output at alternative prices. Each firm produces up to the quantity where Price = Marginal Cost. No reallocation of resources will produce at a lower opportunity cost.
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
SupplyDemand
Dx
Market is Efficient since at Qe the Marginal Value = Marginal cost
Pe
Qe
Marginal Value
MarginalCost
MVx
Qtyx / T
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10
MVx = Dx
Demand = Marginal Value
Exchange Value
Pe
Qe
Consumer Surplus Value (MV – Price)
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
The height reflects the marginal cost of producing an additional unit.
Supply Reflects Marginal Cost
Pe
Qe
Producer Surplus ValuePrice – Marginal Cost
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Supply
Demand
DxSx
Market: Gains from Market: Gains from TradeTrade
Pe
Qe
C.S V.
P.S.V.
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Supply
Demand
DxSx
Market Efficiency: Reduced Output
Pe
Qe
Efficiency Loss
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Supply
Demand
DxSx
Market Efficiency:Increased Output
Pe
Qe
Efficiency Loss
Market Outcome is EfficientMarket Outcome is Efficient
• Marginal Value (MV) of last unit produced = Marginal Cost of production (MC)
• Producing less Efficiency loss
• Producing more Efficiency Loss