INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #1

Figure II-1.1: The Increased Coordination of Decentralized Decision-makers’ Plans Producers (make plans) Error Correction P decrease Produce too much Consume too little Error Correction P increase Produce too little Consume too much Consumers (make plans)

Figure II-1.2: Basic Structure of a Market COMPETITION PRODUCERS COOPERATION COOPERATION CONSUMERS COMPETITION

Table II-2: Demand Schedule for Gasoline

Figure II-2: Demand Curve for Gasoline P $6 $5 $4 D Q 50 100

Table II-3: Supply Schedule for Gasoline

Figure II-3: Supply Curve of Gasoline $3 $2 $1 Q 50 100

Table II-4.1: The Market for Gasoline--Supply and Demand Schedules Combined

Figure II-4.1: The Market for Gasoline--Supply and Demand Curves $6.00 $3.50 D $1.00 Q 125

Figure II-4.2: Excess Supply of Gasoline $6.00 ES $4.50 $3.50 D $1.00 Q 75 125 175 ES = QS - QD =

Figure II-4.2a: The Adjustment Process for Excess Supply $6.00 ES $4.50 $4.00 $3.50 D $1.00 Q 75 125 175 At P = $4, ES =

Table II-4.3: The Market for Gasoline—An Excess Demand

Figure II-4.3: Excess Demand for Gasoline P S $6.00 $3.50 $2.50 ED D $1.00 Q 175 75 125 ED = QD - QS =

Figure II-4.3a: The Adjustment Process for Excess Demand $6.00 $3.50 $3.00 $2.50 ED D $1.00 Q 175 75 125 When P = $3.00, ED =

Table II-4a: An Increase in Demand, QD1

Table II-4b: A Decrease in Demand, QD2

Figure II-4.1: An Increase in Demand P $7.00 $6.00 $3.50 D1 D0 Q 175 125 (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 1 $2.50 D0 Q 125 175 2 A Movement Along a Given Demand Curve

Table II-5: Summary of a Crucial Distinction Cause Effect Language Shift in the Demand Curve Increase or Decrease in Demand Movement Along a Given Demand Curve Increase or Decrease in the Quantity Demanded

Table II-5: An Increase in Demand, QD1

Figure II-5: The Market for Gasoline Showing An Increase in Demand P $7.00 S $6.00 $4.00 $3.50 D1 D0 $1.00 Q 125 150

Table II-6a: An Increase in Supply, QS1

Figure II-6.1: An Increase in Supply $3.50 $1.00 $0.00 Q 125 175 (1) Increase in Supply (2) Increase in the Quantity Supplied At Each Price

Table II-6b: A Decrease in Supply, QS2

Table II-6b: A Decrease in Supply, QS2

Figure II-6.2: An Increase in the Quantity Supplied $4.50 1 $3.50 $1.00 Q 125 175 2 A Movement Along a Given Supply Curve

Table II-7: Summary of a Crucial Distinction Cause Effect Language Shift in the Supply Curve Increase or Decrease in Supply Movement Along a Given Supply Curve Increase or Decrease in the Quantity Supplied

Table II-6a: An Increase in Supply, QS1

Figure II-6.3: The Market for Gasoline Showing An Increase in Supply $6.00 $3.50 $3.00 $1.00 D $0.00 Q 125 150

Figure II-7: Selling Tickets and the Secondary Market for Tickets P S $100 $50 D1 D0 Q 5,000 10,000 20,000 D0 = Regular Event Demand Curve D1 = Very Popular Event Demand Curve

Figure II-8.1: A Consumer’s Surplus $120 CS $95 $70 D $20 Q 500 1000 CS for the 500th unit = $95 - $70 = $25 Consumer gains from trade for 500th unit.

Table II-8: The Market for Apartments

Figure II-8.1: A Consumer’s Surplus (CS) $120 CS $95 $70 D $20 QAPARTMENTS 500 1000 CS for the 500th unit = $95 - $70 = $25 Consumer gains from trade for 500th unit.

Figure II-8.2: Consumers’ Surplus (CS) $120 $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: A Producers’ Surplus $120 $70 $45 PS D $20 Q 500 1,000 PS for the 500th unit = $70 - $45 = $25 Producer gains from trade for 500th unit

Figure II-8.4: Producers’ Surplus (PS) $120 $70 $45 PS D $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 S $120 CS = $25,000 $70 D PS = $25,000 $20 Q 1,000 Note: (1) The Gains from Trade are Maximized at the Social Welfare Maximum. (2) CS + PS = $50,000

Table II-10a: Imposing Taxes on Producers

Table II-10a: Imposing Taxes on Producers

How to Adjust the Supply Schedule for a Tax 1. Choose any quantity supplied (QS) from the supply schedule, say 1,200. 2. The minimum price associated with supplying the 1,200th unit is $80. 3. Since imposing a tax increases the costs of production for a producer, we should add the tax of $20 to the price of $80, yielding $100 as the minimum price at which a producer is willing and able to produce the 1,200th unit. 4. The rest of the numbers for the new supply schedule can be filled in noting that every $10 change in price yields a 200 unit change in the quantity supplied. 5. We now have a new supply schedule which represents a decrease in supply

Figure II-10.1: The Effect of a Tax on the Supply Curve STAX = $20 $100 S0 $80 $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 $120 CS’ S0 P1 = $80 WL P0 = $70 TaxRev P2 = $60 $40 PS’ D $20 Q Q1 = 800 1,000 = Q0

Steps for Understanding How a Tax on Producers Affects the Market and Causes a Welfare Loss 1. Social Welfare Maximum, Original Equilibrium, P = $70, Q = 1,000 2. Impose a Tax = $20, Decrease Supply 3. New Equilibrium, P = $80, Q = 800 4. New CS’ = ½ (800)($120-$80) = $16,000 5. New PS’ = ½ (800)($60-$20) = $16,000 6. Tax Rev = (800)($20) = $16,000 7. Compare Before and After Tax CS and PS CS + PS = $50,000 CS’ + PS’ + Tax Rev = $48,000 8. WL = ½ ($20)(200) = $2,000

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 Market Resources (Lower Valued Uses) Output Decreases Output Increases Producer Tax on Market is equivalent to a subsidy for the Rest of Economy

*Table II-10b: Imposing Taxes on Producers

*Figure II-10.4: The Effect of a Tax on the Supply Curve $10 $2 Q

*Figure II-10.5: The Effect of a Tax on the Supply Curve $22 $12 D $2 Q 5,000

How to Adjust the Supply Schedule for a Subsidy 1. Choose any quantity supplied (QS) from the supply schedule. Say 1,200. 2. The minimum price associated with supplying the 1,200th unit is $80. 3. Since granting a subsidy decreases the costs of production for a producer, we should subtract the subsidy of $20 from the price of $80, yielding $60 as the minimum price that a producer is willing and able to produce the 1,200th unit. 4. The rest of the numbers for the new supply schedule can be filled in noting that every $10 change in price yields a 200 unit change in the quantity supplied. 5. We now have a new supply schedule which represents an increase in supply

Table II-11a: Creating a Subsidy for Producers

Figure II-11.1: The Effect of a Subsidy on the Supply Curve $80 SSUB=$20 $60 $20 Q $00 1,200 Note that the subsidy causes an increase in supply.

Steps for Understanding How a Subsidy to Producers Affects the Market and Causes a Welfare Loss 1. Social Welfare Maximum, Original Equilibrium, P = $70, Q = 1,000 2. Grant a Subsidy = $20, Increase Supply 3. New Equilibrium, P = $60, Q = 1,200 4. Total Subsidy = (1,200)($20) = $24,000 5. WL = $2,000 = ½ ($20)(200)

Figure II-11.2: The Welfare Loss from a Subsidy to Producers $120 SSUB=$20 P2 = $80 P0 = $70 WL P1 = $60 $20 D $00 Q Q0 = 1,000 1,200 = Q1

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 Market Resources (Lower Valued Use) Output Increases Output Decrease s Producer Subsidy in Market is equivalent to a tax on the Rest of Economy

Table II-12: The Market for Rental Housing

Figure II-12.1: The Effect of a Price Ceiling on a Market S $1,200 $1,000 $700 PC = $400 ED D $200 Q 400 1,000 1,600

Figure II-12.2: Effect of Rent Controls on Nearby Uncontrolled Housing Markets P S $900 $700 D1 D0 Q 1,000 2,000

Figure II-12.3: Price Distribution in City without Rent Control

Figure II-12.4: Price Distribution in City with Rent Control

Figure II-13: The Effect of a Price Ceiling on a Market : Welfare Loss $1,200 WL $1,000 $700 PC = $400 ED D $200 Q 400 1,000 1,600

Table II-14: The Market for Corn

Figure II-14: The Effect of a Price Floor on a Market S $12 ES PF = $10 $7 D $2 Q 400 1,000 1,600

Figure II-15: The Rationing Function of Markets P $120 S $70 $20 D Q 1,000