INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #2

Table III-1: The Market for CDs

Figure III-1.1: Calculating the Elasticity of Demand for CDs Q P $20.00 D $18.00 $11.00 $9.00 $2.00 $0.00 a b e c f g Calculate E D for (1) Arc ab, (2) Arc ce, and (3) Arc fg

Figure III-1.2: The Demand Curve and Elasticity Q P $20 $ E D = 1 E D < 1 E D > 1 E D > 1 : Elastic Portion of the Demand Curve E D = 1: Unit Elastic Point on the Demand Curve E D < 1: Inelastic Portion of the Demand Curve

Figure III-1.3: Calculating the Elasticity of Supply for CDs Q P S $2.00 $ a b Arc a to b, E S = 3.0 (Why?) Arc b to c, E S = ? Arc c to d, E S = ? $6.00 c $8.00 d

Figure III-2: The Relation Between Total Revenue and Price Q P $ $18.00 $2.00 $0.00 a b e c $10.00 $16.00 h k E D = 1 E D > 1 E D < 1 $4.00

Figure III-3.1: The Elasticity of Demand and the Ease of Substitution P Q D1D1 $2.00 $ ,000 Q = Crest Toothpaste

Figure III-3.2: The Elasticity of Demand and the Ease of Substitution P Q D0D0 19K 20K $2 $6 Q = Gasoline

Figure III-4.1: The Elasticity of Demand and the Time Horizon D SR Q P

Figure III-4.2: The Elasticity of Demand and the Time Horizon D LR Q P

Figure III-5.1: Time Horizon as a Determinant of the Elasticity of Supply P Q S SR

Figure III-5.2: Time Horizon as a Determinant of the Elasticity of Supply P Q S LR

Table III-6.1: Imposing $20 Tax on Producers

Table III-6.1(a): Imposing $20 Tax on Producers

Figure III-6.1: The Final Burden of a Tax S0S0 S TAX=$20 $20 $40 P 0 = $70 P 1 = $86 P 2 = $66 P Q 1,000 = Q Q 1 = 920 D0D0 CB PB WL

UNDERSTANDING FIGURE III Social Welfare Maximum at P 0 = $70 and Q 0 = 1, Impose Tax = $20, decrease in Supply 3. New Equilibrium at P 1 = $86 and Q 1 = Consumer Burden = CB = (P 1 – P 0 )Q 1 = ($86 -$70)920 = $14, Producer Burden = PB = (P 0 – P 2 )Q 1 = ($70 - $66)920 = $3, TaxRev = T (Q TAX ) = ($20) 920 = $18,400 = CB + PB 7. WL = 1/2(80)($20) = $ Note: In this situation the Welfare Losses are small (why?) and the Tax Revenues are large (why?).

Table III-6.1(a): Imposing $20 Tax on Producers

Elasticity of Demand Calculation for the Final Burden of the Tax in Figure III-6.1 – E D = (5)(172)/1840 = 86/184

Elasticity of Supply Calculation for the Final Burden of the Tax in Figure III-6.1 E S TAX = (20)(172)/1,840) = 344/184 Conclusion: E S TAX > E D. Therefore______.

Table III-6.2: Imposing $20 Tax on Producers

Figure III-6.2: The Final Burden of a Tax D1D1 S0S0 S TAX=$20 $20 $40 P 0 = $70 P 1 = $80 P 2 = $60 $120 P Q 1,000 = Q 0 Q 1 = 800 WL CB PB

UNDERSTANDING FIGURE III Social Welfare Maximum at P 0 = $70 and Q 0 = 1, Impose Tax = $20, decrease in Supply 3. New Equilibrium at P 1 = $80 and Q 1 = Consumer Burden = CB = (P 1 – P 0 )Q 1 = ($80 -$70)800 = $8, Producer Burden = PB = (P 0 – P 2 )Q 1 = ($70 - $60)800 = $8, TaxRev = T (Q TAX ) = ($20) 800 = $16,000 = CB + PB 7. WL = 1/2(200)($20) = $2, Note: In this situation the Welfare Losses are larger (why?) and the Tax Revenues are smaller (why?).

Table III-6.2: Imposing $20 Tax on Producers

Elasticity of Demand Calculation for the Final Burden of the Tax in Figure III-6.2 – E D = 2

Elasticity of Supply Calculation for the Final Burden of the Tax in Figure III-6.2 – E S TAX = 2 – Conclusion: E D = E S TAX = 2. Therefore ______.

Table III-6.3: Elasticity Rules Rule Elasticity Final Burden of Tax 1 When E D > E S 2 When E S > E D 3 When E S = E D

Figure III-6.3: Corporate Tax Rates

Figure III-7.1: Street Price of Cocaine, Institute for Defense Analysis, 1997

Figure III-7.2: Trends in Prices and ED Mentions for Cocaine and Heroin, Author J. Caulkins uses DEA STRIDE Data.

Figure III-7.3: Estimated Methamphetamine Price per Pure Gram Abt Associates Report on Illicit Drug Prices, 2001

Figure III-7.4: The Demand for Illegal Drugs P Q D (a) Popular View P Q P Q P Q Casual Users Compulsive Users Market Demand (b) Economists’ View

Figure III-7.5: The Effect of Prohibition on the Market for Drugs in the Short-Run Q P D S0S0 S1S1 $2 $200 10m 12m S 0 = Legal Supply S 1 = Illegal Supply

Figure III-7.6: Homicides per 100,000 Persons, From Jeffrey Miron, 1999

Figure III-7.7: Real Dollars per capita Spent on Drug and Alcohol Prohibition, Figure 2, from Miron 1999

Figure III-7.8: The Legal Market for Drugs Q P D S0S0 $2 12m S 0 = Legal Supply

Figure III-7.9: The Illegal Market for Drugs in the Short-Run Q P S 0 $2 12m 16m S 0 = Legal Supply S 1 = Illegal Supply D D’ S 1 $200

Figure IV-1: The Paper Mill and The Farmer Paper Mill Farmer River The Paper Mill dumps its waste in the river and the Farmer downstream uses the polluted water to irrigate his fields. The damage to his crops is the external cost imposed involuntarily on the farmer. Question: Why does the Paper Mill dump its wastes in the river?

Table IV-2: Effect of a Negative Externality on the Market for Paper

Figure IV-2.1 The Effect of a Negative Externality on the Paper Market Q PAPER P D S PVT S SOC $120 P 1 = $80 P 0 = $70 $40 $20 Q 1 = 800 1,000 = Q 0

Figure IV-2.2 The Welfare Loss of a Negative Externality Q PAPER P D S PVT S SOC $120 P 1 = $80 P 0 = $70 $40 $20 Q 1 = 800 1,000 = Q 0 $90 WL WL = ½(200)($90 - $70) = $2,000

Figure IV-2.2a: Why a Negative Externality Occurs A negative externality occurs where producers do not take account of the costs imposed on third parties resulting in too much output in the Market with the Negative Externality and too little output in the Rest of Economy Rest of Economy Market Producer Externality Resources Output Increases Output Decreases (Lower Valued Use)

Figure IV-2.3: Central Planning Hierarchy Politburo Council of Ministers GOSPLAN Industrial Ministries State-Owned Enterprises (SOEs) Input Information Output Quotas

Table IV-3: Illustrating the Coase Theorem Assume the following: – D = Damages to the Farmer’s Crops from the Water Pollution produced by the Paper Mill – C PM = Costs to the Paper Mill to Install Pollution Control Equipment – C F = Costs to the Farmer of Cleaning the Water Used for Irrigation (Filters, Chemicals) – D = $20,000 C PM = $50,000 C F = $10,000 Paper Mill (PM) Farmer (F) Do Nothing Clean the Water Do Nothing Clean the Water F = $30,000 PM = $200,000 F = $40,000 PM = $200,000 F = $50,000 PM = $150,000 (1)(2) (3) F = Farmer’s Profits PM = Paper Mill’s Profits

Figure IV-4: The Four-Good Rectangle Private Goods Toll Goods Public Goods Common Pool Goods Degree of Exclusion lowhigh Degree of Rivalry high low