© 2005 Pearson Education Canada Inc. 9.1 Chapter 9 Applications of the Competitive Model

© 2005 Pearson Education Canada Inc. 9.2 Figure 9.1 The supply and demand model

© 2005 Pearson Education Canada Inc. 9.3 Demand and Supply  Increases in demand lead to movements along the supply curve (given an upward sloping supply curve) to an increased equilibrium price and quantity.  Increases in supply lead to movements along the demand curve (given a downward sloping demand curve) an increased equilibrium quantity but a decreased equilibrium price.

© 2005 Pearson Education Canada Inc. 9.4 Figure 9.3 Heating cost functions

© 2005 Pearson Education Canada Inc. 9.5 Figure 9.4 Optimal heating in identical homes

© 2005 Pearson Education Canada Inc. 9.6 Figure 9.5 Optimal heating in different homes

© 2005 Pearson Education Canada Inc. 9.7 Figure 9.6 The economies of a quota

© 2005 Pearson Education Canada Inc. 9.8 From Figure 9.6  An effective quota reduces the quantity supplied and raises the price to consumers.  The quota allows the farmers to earn economic rent, (a return above the opportunity cost).  The value of the quota increases the costs of entering the industry and when a quota is sold to another farmer, the value is transferred completely to the original farmer. This is called the transitional gains trap.

© 2005 Pearson Education Canada Inc. 9.9 Figure 9.7 The economies of rent control

© 2005 Pearson Education Canada Inc Potential Effects of Rent Control  Tenants who occupy apartments when rent control is established will benefit.  All landlords will be worse off and some will be induced to reduce supply.  As a result of reduced supply, some renters are worse off.  The way available apartments are allocated imposes costs on suppliers and renters and the allocation is not Pareto-optimal.

© 2005 Pearson Education Canada Inc Figure 9.8 The effect of a tax on producers

© 2005 Pearson Education Canada Inc From Figure 9.8  A per-unit tax increases the equilibrium price by less than the tax.  The tax creates a deadweight loss as it reduces consumer and producer surplus.  The amount of the tax paid by consumers and producers depends upon the relative elasticities of demand and supply.

© 2005 Pearson Education Canada Inc Figure 9.9 Elasticity of demand and per-unit taxes

© 2005 Pearson Education Canada Inc Figure 9.10 The effect of a tax on consumers

© 2005 Pearson Education Canada Inc Figure 9.11 The effect of a tariff on shoes

© 2005 Pearson Education Canada Inc Figure 9.12 The market for wives

© 2005 Pearson Education Canada Inc Figure 9.13 The equilibrium amount of crime

© 2005 Pearson Education Canada Inc From Figure 9.13  The demand curve for crime shows the declining marginal benefits of a crime as function of the number of crimes.  The supply curve of crime slopes upwards, showing rising marginal costs. A major cost being foregone income from legitimate employment (persons with low alternative earnings are the first to turn to crime).  In equilibrium, the quantity of crime is where the marginal benefits and marginal costs meet.

© 2005 Pearson Education Canada Inc The Economic of Crime  The model suggests two methods to reduce crime: 1. Reduce the net benefits of crime (impose stiffer penalties and increase law enforcement). 2. Raise the opportunity cost (increase job opportunities and raise social safety nets).