INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #2

Table III-1: The Market for DVDs

Figure III-1.1: Calculating the Elasticity of Demand for DVDs P $20.00 a b $18.00 f $11.00 g $9.00 D e $2.00 c $0.00 Q 0 10 45 55 90 100 Calculate ED for (1) Arc ab, (2) Arc ce, and (3) Arc fg

Figure III-1.2: The Demand Curve and Elasticity P ED > 1 $20 ED = 1 $10 ED < 1 Q 50 100 ED > 1 : Elastic Portion of the Demand Curve ED = 1: Unit Elastic Point on the Demand Curve ED < 1: Inelastic Portion of the Demand Curve

Figure III-1.3: Calculating the Elasticity of Supply for CDs $8.00 d $6.00 c $4.00 b $2.00 a Q 0 20 40 60 Arc a to b, ES = 3.0 (Why?) Arc b to c, ES = ? Arc c to d, ES = ?

Figure III-2: The Relation Between Total Revenue and Price ED > 1 $20.00 a b $18.00 ED = 1 h $16.00 $10.00 ED < 1 k $4.00 e $2.00 c $0.00 Q 0 10 20 50 80 90 100

Figure III-3.1: The Elasticity of Demand and the Ease of Substitution P $2.25 $2.00 D1 Q 500 1,000 Q = Crest Toothpaste

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

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

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

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

Figure III-5.2: Time Horizon as a Determinant of the Elasticity of Supply SLR Q

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 P D0 STAX=$20 S0 CB P1 = $86 WL P0 = $70 P2 = $66 $40 PB $20 Q Q1 = 920 1,000 = Q0 1350

UNDERSTANDING FIGURE III-6.1 1. Social Welfare Maximum at P0 = $70 and Q0 = 1,000 2. Impose Tax = $20, decrease in Supply 3. New Equilibrium at P1 = $86 and Q1 = 920 4. Consumer Burden = CB = (P1 – P0)Q1 = ($86 -$70)920 = $14,720 5. Producer Burden = PB = (P0 – P2)Q1 = ($70 - $66)920 = $3,680 6. TaxRev = T (QTAX) = ($20) 920 = $18,400 = CB + PB 7. WL = 1/2(80)($20) = $800 8. 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 17

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

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

Table III-6.2: Imposing $20 Tax on Producers

Figure III-6.2: The Final Burden of a Tax P STAX=$20 $120 CB S0 P1 = $80 WL P0 = $70 P2 = $60 $40 PB D1 $20 Q Q1 = 800 1,000 = Q0

UNDERSTANDING FIGURE III-6.2 1. Social Welfare Maximum at P0 = $70 and Q0 = 1,000 2. Impose Tax = $20, decrease in Supply 3. New Equilibrium at P1 = $80 and Q1 = 800 4. Consumer Burden = CB = (P1 – P0)Q1 = ($80 -$70)800 = $8,000 5. Producer Burden = PB = (P0 – P2)Q1 = ($70 - $60)800 = $8,000 6. TaxRev = T (QTAX) = ($20) 800 = $16,000 = CB + PB 7. WL = 1/2(200)($20) = $2,000 8. Note: In this case the Welfare Losses are larger (why?) and the Tax Revenues are smaller (why?).

Table III-6.2: Imposing $20 Tax on Producers 23

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

Elasticity of Supply Calculation for the Final Burden of the Tax in Figure III-6.2 ESTAX = 2 Conclusion: ED = ESTAX = 2. Therefore ______.

Table III-6.3: Elasticity Rules Final Burden of Tax 1 When ED > ES 2 When ES > ED 3 When ES = ED

Figure III-6.3: Corporate Tax Rates

Figure III-7.1: Street Price of Cocaine, 1983-97 Institute for Defense Analysis, 1997

Figure III-7.2: Trends in Prices and ED Mentions for Cocaine and Heroin, 1981-1997 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 D Q (a) Popular View P P P Q Q 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 $200 S0 $2 D Q 10m 12m S0 = Legal Supply S1 = Illegal Supply

Figure III-7.6: Homicides per 100,000 Persons, 1900-98 From Jeffrey Miron, 1999

Figure III-7.7: Real Dollars per capita Spent on Drug and Alcohol Prohibition, 1900-1998 Figure 2, from Miron 1999

Figure IV-1: The Paper Mill and The Farmer 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. Paper Mill Question: Why does the Paper Mill dump its wastes in the river? River Farmer

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 SSOC $120 SPVT P1 = $80 P0 = $70 $40 D $20 QPAPER Q1 = 800 1,000 = Q0

Figure IV-2.2 The Welfare Loss of a Negative Externality P SSOC $120 SPVT $90 P1 = $80 WL P0 = $70 $40 D $20 QPAPER Q1 = 800 1,000 = Q0 WL = ½(200)($90 - $70) = $2,000

Figure IV-2.3: Why a Welfare Loss Occurs with a Negative Externality 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 Producer Externality Rest of Economy Market Resources (Lower Valued Use) Output Decreases Output Increases

Figure IV-2.4: The Pigouvian Tax SSOC = PVT + EXT P $120 SPVT P1 = $80 P0 = $70 Set TAX = EXT EXT = $20 $40 D $20 QPAPER Q1 = 800 1,000 = Q0 Setting TAX = $20 shifts the Private Supply Curve to the left to Obtain the Optimal Amount of Pollution

Figure IV-2.5: Central Planning Hierarchy Politburo Council of Ministers GOSPLAN Output Quotas Input Information Industrial Ministries Output Quotas Input Information State-Owned Enterprises (SOEs)

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 CPM = Costs to the Paper Mill to Install Pollution Control Equipment CF = Costs to the Farmer of Cleaning the Water Used for Irrigation (Filters, Chemicals) D = $20,000 CPM = $50,000 CF = $10,000 Farmer (F) Do Nothing Clean the Water Do Nothing (1) F = $30,000 PM = $200,000 (2) F = $40,000 PM = $200,000 Paper Mill (PM) Clean the Water (3) F = $50,000 PM = $150,000 F = Farmer’s Profits PM = Paper Mill’s Profits

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