INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #1

Figure II: The Increased Coordination of Decentralized Decisionmakers’ Plans

Producers (make plans) Error Produce too much Correction Consume too little P↓

Produce too little Consume too much

Consumers (make plans)

Error Correction P↑

Table II-1: Demand Schedule for Gasoline P QD $1.00 300 $1.50 270 $2.00 240 $2.50 210 $3.00 180 $3.50 150 $4.00 120 $4.50 90 $5.00 60 $5.50 30 $6.00 00 P = Price QD = Quantity Demanded

Figure II-1: Demand Curve for Gasoline P $6

$5 $4

D Q 60

120

Table II-2: Supply Schedule for Gasoline S P Q $1.00 0 $1.50 30 $2.00 60 $2.50 90 $3.00 120 $3.50 150 $4.00 180 $4.50 210 $5.00 240 $5.50 270 $6.00 300 P = Price QS = Quantity Supplied

Figure II-2: Supply Curve of Gasoline S

P

$3 $2

$1 Q 60

120

Table II-3: The Market for Gasoline-Supply and Demand Schedules Combined P $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00

QD 300 270 240 210 180 150 120 90 60 30 0

QS 0 30 60 90 120 150 180 210 240 270 300

Figure II-3.1: The Market for Gasoline-Supply and Demand Curves P S $6.00

$3.50

D

$1.00

Q 150

Figure II-3.2: Excess Supply of Gasoline P

S

$6.00

ES

$4.50

$3.50

D

$1.00

Q

90

150

210

ES = QS - QD = 210 - 90 = 120

Figure II-3.3: Excess Demand for Gasoline P

S

$6.00 $3.50 $2.50 ED

$1.00 90

150

D 210

Q

ED = QD - QS = 210 - 90 = 120

Table II-4: An Increase in Demand P QD0 QD1 QS $1.00 300 360 00 $1.50 270 330 30 $2.00 240 300 60 $2.50 210 270 90 $3.00 180 240 120 $3.50 150 210 150 $4.00 120 180 180 $4.50 90 150 210 $5.00 60 120 240 $5.50 30 90 270 $6.00 00 60 300

Figure II-4.1: An Increase in Demand P $7.00 $6.00

D1

$3.50

D0 150

210

Q

(1) An Increase in Demand (2) An Increase in the Quantity Demanded At Each Price

Figure II-4.2: An Increase in the Quantity Demanded P $6.00 $3.50 $2.50

D0 150

210

Q

A Movement Along a Given Demand Curve

Table II-4a: Summary of a Crucial Distinction Cause

Effect Shift in the Demand Curve Movement Along a Given Demand Curve

Language Increase or Decrease in Demand Increase or Decrease in the Quantity Demanded

Figure II-4.3: The Market for Gasoline Showing An Increase in Demand P $7.00

S $6.00 $4.00 $3.50

D1 D0

$1.00 150

180

Q

Table II-5: An Increase in Supply P $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00

D

Q 300 270 240 210 180 150 120 90 60 30 00

S Q0

00 30 60 90 120 150 180 210 240 270 300

S Q1

60 90 120 150 180 210 240 270 300 330 360

Figure II-5.1: An Increase in Supply P

S0 S1

$3.50

$1.00

$0.00

Q 150

210

(1) Increase in Supply (2) Increase in the Quantity Supplied At Each Price

Figure II-5.2: An Increase in the Quantity Supplied P S0 $4.50 $3.50 $1.00 150

210

Q

A Movement Along a Given Supply Curve

Table II-5a: Summary of a Crucial Distinction Cause

Effect Shift in the Supply Curve

Language Increase or Decrease in Supply

Movement Along a Increase or Given Supply Curve Decrease in the Quantity Supplied

Figure II-5.3: The Market for Gasoline Showing An Increase in Supply P

S0

$6.00

S1

$3.50 $3.00 $1.00

D Q

$0.00

150 180

Figure II-6: Selling Tickets and Scalping P

S

$100

$50

D1

D0 5,000 10,000 20,000 D0 = Regular Event Demand Curve D1 = Very Popular Event Demand Curve

Q

Table II-8: The Market for Bicycles P $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120

QD 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 00

QS0 00 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Figure II-8.1: Consumers’ Surplus (CS) P $120

CS

S

$95 $70

D $20

Q 500

1000

CS for the 500th unit = $95 - $70 = $25 Consumer gains from trade for 500th unit.

Figure II-8.2: Consumers’ Surplus (CS) P $120

CS

S

$70

D $20

Q 1000

CS = 1/2 bh = 1/2(1,000)($120 - $70) = $25,000 = Total consumer gains from trade

Figure II-8.3 Producers’ Surplus (PS) P

S

$120

$70

$45

D $20

Q 500

1,000

PS for the 500th unit = $70 - $45 = $25 ($25 is the gains from trade for the producer of the 500th unit)

Figure II-8.4 Producers’ Surplus (PS) P

S

$120

$70

$45

D

PS $20

Q 500

1,000

PS = ½ (b)(h) = ½ (1000)($70 - $20) = $25,000 = Total Producer Gains from Trade

Figure II-9: The Social Welfare Maximum P $120

CS

S

$70

$20

D

PS

Q 1,000

Note: (1) The Gains from Trade are Maximized at the Social Welfare Maximum. (2) CS + PS = $50,000

Table II-10: Imposing Taxes on Producers D S S P Q Q0 Q TAX =$20 $20 2,000 00 ** $30 1,800 200 ** $40 1,600 400 00 $50 1,400 600 200 $60 1,200 800 400 $70 1,000 1,000 600 $80 800 1,200 800 $90 600 1,400 1,000 $100 400 1,600 1,200 $110 200 1,800 1,400 $120 00 2,000 1,600

Figure II-10.1: The Effect of a Tax on the Supply Curve P STAX = $20 $100 $80

S0

$40

$20 Q

1,200 Note that the tax causes a decrease in supply

Figure II-10.2: The Effect of a Tax on a Market P

STAX=$20 CS’

$120 P1 = $80 P0 = $70 P2 = $60

S0 WL

TaxRev

$40 $20

PS’ Q1 = 800 1,000 = Q0

D Q

CS’ = 1/2(800)($120 - $80) = $16,000 WL = 1/2(1000 - 800)($80 - $60) = $2,000 PS’ = 1/2(800)($60 - $20) = $16,000 TaxRev = T (QTAX) = ($20) 800 = $16,000 Note that CS’ + PS’ + WL + TaxRev = $50,000.

• • • • • • • •

Explanation of Symbols CS’ = Consumers’ Surplus After the Tax PS’ = Producers’ Surplus After the Tax WL = Welfare Loss Tax Rev = T (Q1) = Total Revenue from Tax P0 = Price Before Tax P1 = Price to Consumers After Tax P2 = Net Price to Producers After Paying Tax Note that CS + PS = $50,000 where CS is the original Consumers’ Surplus and PS is the original Producers’ Surplus.

Figure II-10.3: Effect of a Producer Tax • Tax on producers results in misallocation of resources: Too little output in taxed Market and too much output in the Rest of Economy Producer Tax Rest of Economy

Resources

Market

(Lower Valued Uses)

Output

Output

Producer Tax on Market is equivalent to a subsidy for the Rest of Economy

Table II-11: Creating a Subsidy for Producers P QD QS0 QSSUB $20 2,000 00 400 $30 1,800 200 600 $40 1,600 400 800 $50 1,400 600 1,000 $60 1,200 800 1,200 $70 1,000 1,000 1,400 $80 800 1,200 1,600 $90 600 1,400 1,800 $100 400 1,600 2,000 $110 200 1,800 2,200 $120 00 2,000 2,400

Figure II-11.1: The Effect of a Subsidy on the Supply Curve S0 P SSUB=$20

$80 $60 $20 $00

1,200

Q

Note that the subsidy causes an increase in supply.

Figure II-11.2: The Welfare Loss from a Subsidy for Producers S0 P $120 P2 = $80 P0 = $70 P1 = $60

SSUB=$20 WL

$20

$00

D Q0 = 1,000 1,200 = Q1

Q

WL = 1/2(1,200 - 1,000)($80 - $60) = $2,000 = $24,000 -$22,000

Explanation of Symbols • • • • • •

WL = Welfare Loss Tot Sub = Sub/Q (QSUB) = (P2 - P1) (QSUB) = Total Amount Subsidies Paid to Producers P0 = Price Before Subsidy P1 = Price to Consumers After Subsidy P2 = Price for Producers After Receiving Subsidy

Figure II-11.3: Effect of a Producer Subsidy • Subsidy to producers results in misallocation of resources: Too much output in subsidized Market and too little output in the Rest of Economy Producer Subsidy

Rest of Economy

Resources (Lower Valued Use)

Output

Market Output

Producer Subsidy in Market is equivalent to a tax on the Rest of Economy

Table II-12: The Market for Rental Housing P $20 $30 PC $40 $50 $60 $70 $80 $90 $100 $110 $120

QD 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 00

QS0 00 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Figure II-12.1: The Effect of a Price Ceiling on a Market, Part 1 P

S

$120 $100 $70 PC = $40

ED

$20 400

1,000

D 1,600

Q

Figure II-12.2: The Effect of a Price Ceiling on a Market, Part 2 P

S

CS’

$120

WL

$100 $70 PC = $40 $20

ED PS’

D Q

1,000 1,600 400 PS’ = 1/2(400)($40 - $20) = $4,000 CS’ = 1/2(400)($120 - $100) + (400)($100 - $40) = $28,000 WL = 1/2(1000 - 400)($100 - $40) = $18,000

Figure II-12.3: Effect of Rent Controls on Nearby Uncontrolled Housing Markets P S $90 $70

D1 D0

1,000 2,000

Q

Table II-13: The Market for Corn P $20 $30 $40 $50 $60 $70 $80 $90 PF $100 $110 $120

D

Q 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 00

S

Q 0 00 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Figure II-13: The Effect of a Price Floor on a Market P

S

$120

ES

PF = $100 $70

D

$20

Q 400

1,000 1,600

Figure II-14.1: The Current System for Payment of

Medical Services Two Party Payer System: LASIK Surgery (Consumer Sovereignty)

Services Consumers

Doctors

$s Current Third Party Payer System (Insurer/Government Sovereignty) $s Employers

Medical Insurers

$s

Services Consumers (Employees)

Doctors

$s

Government (Medicare)

$s

Figure II-14.2: The Market for Medical Care P

S

$120 $70

D

$20

Q 1,000

Table II-14: Paying a Subsidy to Consumers P $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120

D

Q 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 00

S Q0

00 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

D Q SUB = $20

2,400 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400

Figure II-14.3: The Market for Medical Care with Consumer Subsidy P $140

S

$120 WL

P1 = $80 $70 P2 = $60

DSUB

D

$20

Q 1,000

1200

Figure II-14.4: Price Controls in Medicare and Medicaid Markets P $140

S

$120 $80 PC = $70

ED

DSUB D

$20 1,000 1,200 1,400

QDOCTOR’S SERVICES

Figure II-14.5: The Ideal System for Payment of Medical Services •

Three Party Payer System

Services Consumers

Doctors

HSAs: $s HSA = Health Saving Account (Pays for small to Medium-sized medical bills)

Premiums $s

$s Large Payments after deductible is met

Medical Insurers (Catastrophic Coverage)

Note: Coverage similar to life insurance policies where policyholder has a long-term contract which cannot be cancelled because of “pre-existing conditions”

Figure II-15: The Rationing Function of Markets P $120

S

$70

D

$20 1,000

Q

All consumers whose Demand Price exceeds $70 will obtain the good. All producers whose Supply Price is less than $70 will produce the good.