P F ** = 2.00 P C = 2.40 P F = 2.00    Equilibrium Review: Illustrating the effect of a tax. P ($/gallon) Q (thousands of gallon per day) P* = 2.10 Q* = 8, P C ** = 2.40 Q** = 7,500 D S The point on the demand curve is the equilibrium price from the perspective of consumers. Start at the no tax equilibrium and move left until the vertical gap between the demand and supply curves equals the amount of the tax. The point on the supply curve is the equilibrium price from the perspective of firms. 8,000=8,000 Tax:P F = P C  Tax P F = P C .40 Quantity demanded determined by P C Quantity supplied determined by P F P = ,500 = 7,500 Quantity DemandedQuantity Supplied The associated quantity is the new equilibrium quantity. The price from the perspective of consumers increases, but by less than the full amount of the tax. The equilibrium quantity decreases. The price from the perspective of firms decreases, but by less than the full amount of the tax. Even though the legal incidence is entirely borne by the firm, the burden is shared by both firms and consumers. First, the no tax equilibrium. Question: How can we quantify the burden borne by consumers and firms? Question: Why do we move to the left rather than the right?

Greatest Amount a Student Student Would Pay Andy Kate Dan Liz Meg Ned Q P D Consumer Surplus and Producer Surplus Market Demand Curve for Tutors Revealed Preference When the price of a good is $xxx and an individual, call him Joe, does purchase the gooddoes not purchase the good  Joe values the benefits of the good by at least $xxx  Joe values the benefits of the good by less than $xxx  Value Joe places on the benefits  $xxx  Value Joe places on the benefits < $xxx Question: By how much does each student value the benefits of tutoring services? Joe’s actions reveal his preferences. How many students would hire a tutor if the tutor’s “price” was ______, given that …?

Greatest Amount Studenta Student Would Pay Andy Kate Dan Liz Meg Ned Question: By how much does Andy value the benefits of tutoring services? If the price of tutoring services $275  Andy would purchase tutoring services.  Value Andy places on the benefits  $275 If the price of tutoring services were $276  Andy would not purchase tutoring services.  Value Andy places on the benefits < $276  Value Andy places on the benefits of tutoring services = $275. The value a student places on the benefits of tutoring services equals Greatest amount the student would pay for tutoring services Value of Benefits Question: Why do the values differ from student to student? Claim: Question: By how much does each student value the benefits of tutoring services?

Consumer Surplus Value ofNet Benefit of Receiving Tutoring Services StudentTutoring BenefitsIf price = $250If price = $150If price = $50 $ $ $ $ Andy Kate Dan Liz Meg Ned Consumer Surplus The value a student places on the benefits of tutoring services equals Greatest amount the student would pay for tutoring services Consumer Surplus: Net benefit buyers enjoy from purchasing and consuming the good.

Q P D 300 Greatest Amount a Student Would PayNet Benefit of Receiving Tutoring Services StudentValue of BenefitsIf price = $250If price = $150If price = $50 $ $ $ $ Andy Kate Dan Liz Meg Ned Consumer Surplus Consumer Surplus: Net benefit buyers enjoy from purchasing and consuming the good. Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good. Consumer Surplus: The benefit each buyer enjoys from consuming the good less what each buyer must pay for the good. Area Beneath the Market Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good.

Least Amount Required to Induce a Major Studentto Be a Tutor Kim John Adam Lisa Walt Beth Q P S Market Supply Curve for Tutors Revealed Preference When the price of a good is $xxx and an individual, Joe, does purchase the gooddoes not purchase the good  Joe values the benefits of the good by at least $xxx  Joe values the benefits of the good by less than $xxx  Value Joe places on the benefits  $xxx  Value Joe places on the benefits < $xxx Question: What is each major’s opportunity cost of providing tutoring services? How many majors would agree to be a tutor if the tutor’s “price” was ______, given that …?

Least Required to Induce a Major to Provide StudentTutoring Services Kim John Ralph Lisa Walt Beth The value of a major’s opportunity cost of providing tutoring services equals The least amount required to induce a major to provide tutoring services Opportunity cost represents whatever is foregone when an activity is pursued. Question: What is Beth’s opportunity cost of providing tutoring services? If the price of tutoring services were $24  Beth would not provide tutoring services.  Value Beth places on the “other activity” > $24 If the price of tutoring services were $25  Beth would provide tutoring services.  Value Beth places on the “other activity”  $25  Value Beth places on the “other activity” = $25.  Beth would pursue the “other activity.”  Beth would not pursue the “other activity.” Beth’s opportunity cost of providing tutoring services equals the value she places on the benefits she receives from the “other activity.”  Beth’s opportunity cost of providing tutoring services = $25. Opportunity Cost Question: Why do the opportunity costs of the majors differ? Question: What is each major’s opportunity cost of providing tutoring services? Claim:

Producer Surplus Least Required to Induce a Major to Provide Tutoring ServicesNet Benefit of Providing Tutoring Services StudentOpportunity CostIf price = $50If price = $150If price = $ Kim John Ralph Lisa Walt Beth Producer Surplus The value of a major’s opportunity cost of providing tutoring services equals The least required to induce a major to provide tutoring services Producer Surplus: Net benefit sellers enjoy from production and sale the good.

Q P S Opportunity Cost of ProvidingNet Benefit of Providing Tutoring Services Student Tutoring Services If price = $50If price = $150If price = $ Kim John Ralph Lisa Walt Beth Producer Surplus Producer Surplus: The net benefit sellers enjoy from producing and selling the good. Height of Market Supply Curve: The seller’s opportunity cost of providing a specific unit of the good. Producer Surplus: What each seller receives from the sale of the good less the opportunity cost each seller incurs by providing it. Area Above the Market Supply Curve Lying Beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good.

Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good. Height of Market Demand Curve: Reflects the benefit a buyer enjoys from consuming a specific unit of the good. Consumer Surplus: The net benefit buyers enjoy from purchasing and consuming the good; the benefit each buyer enjoys from consuming the good less what each buyer must pay. Area Beneath the Demand Curve Lying Above the Price: Reflects all the net benefits buyers enjoy, the consumer surplus, from purchasing and consuming the good. Summary: Consumer and Producer Surplus Producer Surplus: The net benefit sellers enjoy from producing and selling the good Height of Market Supply Curve: The seller’s opportunity cost of providing a specific unit of the good. Producer Surplus: The net benefit sellers enjoy from producing and selling the good; what each seller receives from the sale of the good less the opportunity cost each seller incurs by providing it. Area above the Supply Curve Lying beneath the Price: Reflects all the net benefit sellers enjoy, the producer surplus, from producing and selling the good.