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OF COMPETITIVE MARKETS
Course instructor:
Dr. Tamgid Ahmed Chowdhury
CHAPTER OBJECTIVES
We will:
Evaluate the Gains and Losses from Government
PoliciesConsumer and Producer Surplus
Discuss the Efficiency of a Competitive Market
Analyze Minimum Pricing policies
Analyze Price Supports and Production Quotas
Discuss Import Quotas and Tariffs
Analyze the Impacts of a Tax or Subsidy
CONSUMER SURPLUS
It is the difference
between what consumer
is willing to pay and what
he/she is actually paying
In this diagram,
consumer A is ready to
pay 10 taka but actually
paying 5 taka (market
price) thus has a surplus
of (10-5) = 5 taka.
For consumer B, the
amount is 2 taka. But for
consumer-C, there is no
surplus.
PRODUCER SURPLUS
Its the difference
between the market
price and the
production cost of a
specific quantity.
In other words its the
area between supply
curve and the price
line.
MATHEMATICAL EXAMPLE ON
TARIFF
U.S. supply: QS = -7.48
+ 0.84P
U.S. demand: QD = 26.7
- 0.23P
Price was initially 12
cents/pound.
Government has
imposed a tariff of 15
cents/pound. Show the
change in consumer
surplus, producer
surplus, government
revenue gain and DWL
according to new tariff.
IMPACT OF TAX
Who really pays these
taxes?
Income tax (Direct tax)
- deducted from your
pay,
GST (Indirect tax) added to the price of
most things you buy
Direct tax reduces the
buying power of the
individuals and thus
shifts the demand curve
to the left.
INCIDENCE OF INDIRECT
TAX
Figure shows the effects of this
tax.
With no tax: Equil. price = $3.00
a packet
With tax on sellers of $1.50 a
packet
Indirect tax amount equals the
vertical distance between two
supply curves
The market price paid by buyers
rises to $4.00 a packet and the
quantity bought decreases.
The price received by the sellers
falls to $2.50 a packet.
Lets see the change in consumer
and producer surplus and DWL.
INEFFICIENCY CREATED BY
INDIRECT TAX
Tax revenue takes part of the total surplus.
The decreased quantity creates a deadweight loss
MATHEMATICAL EXAMPLE ON
INDIRECT TAX
Demand equation is Q = 9 P
Supply equation is Q = -1 + P
Government has imposed an indirect tax of 2 Taka on
the product. Find the new equilibrium, change in
consumer and producer surplus and amount of
government revenue and DWL.
First convert the Supply equation to: P =1 + Q
And Demand equation to: P = 9 -Q .
EFFECTS OF SUBSIDY
Price = $40 a tonne
and the Quantity
produced = 40 million
tonnes a year.
With a subsidy of $20
a tonne: Marginal cost
minus subsidy falls by
$20 a tonne and the
curve S subsidy is
the new supply curve.
Market Price falls to
$30 a tonne