Chapter 8
performance and strategy in
competitive market
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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
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Why is it called Perfect Competition?
Max social welfare
Welfare Economics:
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Economic
the study of how the allocation of
resources affects economic wellbeing.
welfare:
consumer’ s welfare + producer’s welfare
Consumer surplus:
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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
John’
s willingness to pay
$100
Paul’
s willingness to pay
80
George’
s willingness to pay
70
Ringo’
s willingness to pay
50
Demand
0
1
2
3
4
(a) Price = $80
Price
$100
John’
s consumer surplus ($20)
80
70
50
Demand
0
1
2
3
4
Quantity
The consumer surplus
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The area below the demand
curve and above the price.
How the Price Affects Consumer Surplus
(a) Consumer Surplus at Price P
Price
A
Consumer
surplus
P1
B
C
Demand
0
Q1
Quantity
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Producer surplus
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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
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producer surplus
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The area below the price and above the
supply curve.
Figure How the Price Affects Producer Surplus
Producer Surplus at Price
P
Price
Supply
P1
B
Producer
surplus
C
A
0
Q1
Quantity
Copyright©2003 Southwestern/Thomson Learning
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
Price A
D
Supply
Consumer
surplus
Equilibrium
price
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
Copyright©2003 Southwestern/Thomson Learning
Figure The Efficiency of the Equilibrium Quantity
Price
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
0
Value
to
buyers
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Demand
Quantity
Value to buyers is less
than cost to sellers.
Copyright©2003 Southwestern/Thomson Learning
Summary
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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
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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
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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
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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
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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 no
participate in the transaction.
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Two types of externality:
**Negative externality ( spillover cost):
the adverse effect on the bystander
**Positive externality ( spillover benefit):
the beneficial effect on the bystander
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Negative Externalities
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Automobile exhaust Cigarette smoking
Barking
dogs (loud pets)
Loud stereos in an apartment building
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Positive Externalities
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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)
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The rule of decision making
The basis of Private decision making:
private costs and benefit.
S (private cost)
e
D (private value)
0
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Qmarket
Externality:
Social cost= private cost+ external cost
Social benefit= private benefit+ external benefit
Q
1.External cost: social cost >private cost
(overallocation of resources)
Cost of pollution
Qoptimum< Qmarket: too much quantity produced
2.External benefit: social benefit>private benefit
(underallocation of resources)
Education
Qmarket<Qoptimum: too small quantity produced
Conclusions
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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
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Price Floors
Price floors→ surplus production.
Aim:special interest groups
Price Ceilings
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Price ceilings →cause shortages.
To make housing more affordable.
To fill in the blanks;
P
to draw demand, MR, AR and
TR curve
Q
6
0
5
1
4
2
3
3
2
4
1
5
TR AR MR Ed
Your Boss during recession...
Be good, OK....
After a week…
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Please, put more effort in your work ......
After a month….
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I SAID “MORE EFFORT” !!!!
After a quarterly report…
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Did you hear me? More effort!!!