Part I. Principles A.Markets B.Market failure C.Discounting & PV D.Markets 2 E.Dynamic efficiency F.Pollution solutions

First topic Competitive markets vs. monopolies

$ Quantity q* S = MC D = MB = MR Competitive market p*

Competitive market: Price = MR In competitive market, firm price-taker (lots of firms in market), each additional unit sold same price, p= MR

Example P = MR PriceQuantityTRMR

$ Quantity q* S = MC D = MB(c) Monopoly MR = MB(p) qm pm p*

Monopoly: P > MR

Why? In a monopoly, firm is price maker (only firm in market). Because they face downward sloping demand curve, in order to sell 1 more unit, they must lower price Therefore, price > MR Pink shaded area social cost resulting from restricted output & higher price (“deadweight loss,” “excess burden”)

Example P > MR PriceQuantityTRMR

Second topic Solving for consumer, producer, and total surplus (CS, PS, TS)

Consumer surplus (CS) CS: area under demand curve, above equilibrium price

Producer surplus (PS) PS: area below price, above MC (or TR-TC)

Total surplus = social welfare = CS + PS

Solving for CS and PS Remember how to find the area of a triangle? CS = ½ *base*height = ½* Q*(max p – p) PS = ½ *base*height = ½* Q*(p – min p)

Example – solve for CS, PS, TS $ Q 20 P* = 10 Q* = 15 5 S D

Solution? CS = ½ * 15 * 10 = $75.00 PS = ½ * 15 * 5 = $37.50 Total surplus (social welfare) = CS + PS = $112.50