Microeconomics III. Katarzyna Metelska-Szaniawska

Transcription

1 Microeconomics III Katarzyna Metelska-Szaniawska

2 Contact (Micro 3) office hours: tba

3 Agenda for today requirements for passing the course readings introduction: demand, supply, consumer/producer surplus, efficiency what will follow?

4 Class organization this is a seminar class active participation is expected! short theoretical introductions reading given chapters before class is expected! short tests 5 per semester (dates not announced) problem-solving volunteers case studies - discussion debate

5 COURSE REQUIREMENTS Total max score 100 points 4 elements: A) active participation in class (20%) - short tests: 5 x 2 points (max) - problem-solving: 3-5 points (max) / problem - total: max 20 points B) participation in debate in class (10%) C) written paper (20%) D) final test (exam) (50%)

6 Written papers should tackle an interesting question gathering data/information on your own (in groups) analysis with direct relation to concepts and theories discussed in class (e.g. externalities, efficiency) best suggest a topic yourselves, if not suggestions from me E.g.: cigarettes are subject to excise tax, restrictions concerning advertisement, sale, consumption etc. Which of these regulations, if any, should also concern e-cigarettes?

7 Example of an exam question Assume: goods x, y; consumers A, M; total endowment of good x equals that of y; A s preference: U=min{x,y}, M s preference: U=max{x,y}. In an Edgeworth Box the set of Pareto-efficient allocations will consist of: a. Two diagonals. b. One of the diagonals. c. The entire diagram (box). d. The diagonals and the outer borders of the diagram (box). e. The outer borders of the diagram (box).

8 Readings Varian H.R. (1999), Intermediate Microeconomics A Modern Approach, 5 th ed. (or more recent editions) Additional handbooks: Borland (2008); Mansfield and Peoples (2003); Estrin, Laidler, Dietrich (2008); Pindyck and Rubinfeld (2004); Schotter (2009) Workouts: Bergstrom and Varian (1993 or later) (in Polish: Czarny and Nojszewska, Laidler and Estrin)

9 Reservation price Reservation price the highest price that the buyer is willing to pay or the lowest price that the seller is willing to accept Having the possibility to buy or sell at the reservation price we are indifferent. Reservation prices determine the shape of demand and supply curves.

10 Supply Changes in supply (supplied quantities) movement along the supply curve caused by price changes Changes of the supply shifts of the supply curve caused by e.g. changes in the production costs

11 Demand Changes in demand (demanded quantities) movement along the demand curve caused by price changes Changes of demand shifts of the demand curve cause by e.g. changes in consumer income or preferences

12 Partial equilibrium Partial equilibrium equality of demand and supply in the market of a single good or service (partial because we omit interrelationships between prices and quantities in different markets; general equilibrium will be tackled later)

13 Changes of demand and supply Demand (downward-sloping) D (shift to the right) => Q and P D (shift to the left) => Q and P Supply (upward-sloping) S (shift to the right) => Q and P S (shift to the left) => Q and P

14 Simultaneous changes of demand and supply In the case of simultaneous changes of demand and supply their effect on prices and market quantity is determined by: the size and direction of the changes of demand and supply the shape of the demand and supply curves

15 Disequilibrium: excess supply (a supply surplus) in the market P > P* => Q s > Q d => P P P' surplus nadwyżka S => Q d and Q s => equilibrium P* D Qd Q* Qs Q

16 Disequilibrium: excess demand (a supply deficit) in the market P < P* P S => Q d > Q s => P => Q d and Q s => equilibrium P* P" niedobór deficit D Qs Q* Qd Q

17 Consumer and producer surplus Consumer surplus (CS) the total benefit of the consumer from a given good after substracting the costs of buying it. Represented by the area between the demand curve and the market price. Producer surplus (PS) the total benefit of the producer from selling a given good after substracting the costs of manufacturing it. Represented by the area above the supply curve and below the market price.

18 Economic surplus Economic surplus (ES) the sum of the consumer surplus and the producer surplus; the sum of the differences between reservation prices of buyers and sellers of consecutive units of a good exchanged in the market; the difference between total social benefits and total social costs ES is a (simplified) measure of welfare

19 Optimality criterion Pareto optimum improving the situation of any economic agent must necessarily lead to worsening the situation of another agent (no possibility of Pareto-improvement)

20 Consumer surplus and producer surplus (perfect competition) P CS Equilibrium in the Pareto optimum S PS D Q

21 (Consumer) surplus depends on elasticity (of demand) P P S S D D Q Relatively high elasticity of demand (~elastic demand) Q Relatively low elasticity of demand (~inelastic demand)

22 Deadweight loss resulting from monopoly P P m A Loss of consumer surplus Deadweight loss resulting from monopoly B MC As a result of a higher equilibrium price the consumer loses A+B, while the producer gains A-C. P C C AR=D MR Q m Q C Q

23 The case of perfect price discrimination Every consument faces his or her reservation price. Those whose reservation price is higher or equal to marginal cost make a purchase. No deadweight loss compared to perfect competition

24 The case of two-part tariffs Lump-sum fee + per-unit charge (vacuum cleaner + bags, party entrance fee + drinks etc. ) In the typical case of non-identical customers, the per-unit price is lower than would have been if lump-sum fee was not an option but higher than marginal cost Non-zero deadweight loss, but lower than would have been without lump-sum fees

25 Consumer surplus: some algebraic examples Assume Q(p)=a-bp. Then the change in surplus resulting from a change in price from p to r>p is: r p ( a bt) dt 2 t = ( at b ) 2 Cobb-Douglas utility U(x,y)=x a y 1-a with a budget of m gives demand: x(p)=am/p. Then r p am t dt = r amln t p r p = = a( r am(ln r p) b r ln 2 p) p 2 2

26 What will follow?