1. INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #3

3. Figure VI-1.1: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K The Market Q P S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0

4. Figure VI-1.2: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K The Market Q P D’ $35 S LR For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 causes entry.

5. Figure VI-1.3: An Increase in Demand in an Increasing Cost Industry D S SR $20 100K 105K110K The Market Q P D’ $35 S’ SR S LR $30 For an increase in demand: 1.Start at P SR = P LR, Π = 0 2.Increase demand 3.P SR > P LR, Π > 0 causes entry. 4.Entry causes S to increase. 5. Costs also increase and P decreases until P SR = P LR and Π = 0 (back in LR equilibrium).

7. Figure VI-1.4: Reallocation of Labor Over Time Source: W. Michael Cox and Richard Alm, “A Better Way” Annual Report, Federal Reserve Bank of Dallas 2003, p. 4.

8. Figure VI-2.1: A Decrease in Supply in an Increasing Cost Industry with Legal Entry Barriers D S SR $20 80K 100K The Market Q P S LR For a decrease in supply: 1.Start at P SR = P LR, Π = 0 2.Short-run S decreases producing Π > 0. 3.Entry barrier prevents S from increasing. S’ SR $30

9. Explanation of Figure VI-2.1 – (1) Market is in LR equilibrium/Social Welfare Maximum – (2) An decrease in market supply occurs because entry barrier imposed. – (3) Decreased supply causes an increase in the market price which creates positive profits (P > P LR ). – (4) Positive profits would cause new entry but new entry cannot occur because of the legal entry barriers. These legal entry barriers create a Welfare Loss

13. NYC Taxi Medallions 1970-2010 Source: Why taxi medallions cost $1 million by Felix Salmon, Reuters, October 21, 2011

14. Table VI-1: Statistics on US Farms, 1982 Size GroupAnnual Sales# of Farms% of Total 1 $40,000< 1,709,000 71.2% 2 $40,000- $99,999 393,000 16.4% 3 $100,000+ 298,000 12.4% Total 2,400,000 100.0% Source: USDA, Economic Indicators of the Farm Sector, 1982

15. Table VI-2: Statistics on US Farms, 1982 Size Group Gross Farm Income Percent of Total Net Farm Income Average Net Income Average Net Worth 1 $27.2B 16.6% -$0.9B$17,800$131,000 2 $31.3B 19.1% $2.2B$16,200$482,400 3$105.5B 64.3% $22.7B$89,100$1.1073M Total$164.0B100.0% $24.0B Source: USDA, Economic Indicators of the Farm Sector, 1982

16. Table VI-3: Farm Production by Size Class, 2001 Type FarmProduction Class Farms # % % of Production Rural Res< $20,0001.252M 58.0 4.6 Small Fam$20K-$49,999337K 15.6 4.7 Family$50K-$99,999 $100K-$249,999 202K 9.4 199K 9.2 6.1 13.9 Large Family $250K-$499,999 89K 4.1 13.6 Very Large$500K-$999,999 $1M+ 49K 2.3 31K 1.4 14.8 42.3

17. Table VI-4: The Market for Wheat with Price Support P Q D PVT Q D PVT + USDA Q S $0.00 130 190 ** $2.00 120 180 00 $4.00 110 170 20 $6.00 100 160 40 $8.00 90 150 60 $10.00 80 140 80 $12.00 70 130 100 P SUP $14.00 60 120 $16.00 50 110 140 $18.00 40 100 160 $20.00 30 90 180

18. Figure VI-4: The Market for Wheat with Price Supports P Q S D PVT $10 $26 $2 60 80 120 P SUP = $14 D PVT + USDA ES Consumers pay = $14(60) = $840 USDA pays = $14(120 – 60) = $840

19. Table VI-5: The Market for Wheat with Price Supports and Production Controls (PC) P Q D PVT Q D PVT + USDA Q S Q S PC = 70 $0.00 130 140 ** $2.00 120 130 00 $4.00 110 120 20 $6.00 100 110 40 $8.00 90 100 60 $10.00 80 90 80 70 $12.00 70 80 100 70 *$14.00 60 70 120 70 $16.00 50 60 140 70 $18.00 40 50 160 70 $20.00 30 40 180 70

20. Figure VI-5: The Market for Wheat with Price Supports and Production Controls P Q S D PVT $10 $26 $2 60 70 80 P SUP = $14 S PC = 70 ES D PVT + USDA Consumers pay $14(60) = $840 USDA pays $14(10) = $140

21. Table VI-6: Target Prices P Q D PVT Q S $0.00 130 ** P CON $2.00 *120 00 $4.00 110 20 $6.00 100 40 $8.00 90 60 $10.00 80 $12.00 70 100 P TAR $14.00 60 *120 $16.00 50 140 $18.00 40 160 $20.00 30 180

22. Steps for Finding Consumer Price, P CON 1. Find Target Price = $14 2. Find Quantity Supplied at P = $14. Q S = 120. 3. Find Quantity Demanded of 120. 4. Price for Q D = 120 is P = $2.

23. Figure VI-6: The Market for Wheat with a Target Price P Q S D PVT $10 $26 P CON = $2 80 120 P TAR = $14 Consumers Pay Farmers $2(120) = $240 USDA Pays Farmers ($14-$2)(120) = $1,440

24. Figure VI-7: The Welfare Loss in a Market for Wheat with a Target Price P Q S D PVT $10 $26 P CON = $2 80 120 P TAR = $14 WL WL = ½(b)(h) = ½ $12(40) = $240

25. Figure VI-8a: Effect of Price Supports in the Short-Run ES SR D SR S SR S LR D LR Short-Run Cost To USDA P Q P0P0 P SUP

26. Figure VI-8b: Effect of Price Supports in the Long- Run ES LR D SR S SR S LR D LR P Q P0P0 P SUP S’ SR Long-Run Cost To USDA

27. Explanation of Figures VI-8a and 8b 1. Start at Social Welfare Maximum, P 0 = P LR 2. Raise price to P SUP so that P SUP > P LR, and existing firms will now have positive profits. 3. That will attract new entry (In this case, it will mean existing farms buying up smaller farms and adding more capacity). New entry will cause the costs to rise (increasing cost industry) but prices do not fall because of the price floor. 4. New entry continues until costs have risen enough to reduce profits to zero. (This occurs at P SUP.) 5. Cost of price supports is larger in the LR than the SR.

28. Figure VI-9: 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 Rest of Economy Farm Markets Farm Subsidy Resources Output Increases Output Decreases (Lower Valued Use) Farm Subsidy in Farm Markets is equivalent to a tax on the Rest of Economy

29. Table VI-9: Size of Farm and Government Payments, 2001 Value Category Farms # % Govt Payments $ % $1M+ 31K 1.4 $2.029B 9.8 $500K-$999,999 49K 2.3 $3.252B 15.7 $250K-$499,999 89K 4.1 $4.492B 21.7 $100K-249,999 199K 9.2 $5.123B 25.2 $50K-$99,999 202K 9.4 $2.224B 10.7 $20K-$49,999 336K 15.6 $1.436B 6.9 <$20K1,252K 58.0 $2.081B 10.0 All Farms2,158K 100.0$20.727B 100.0

30. Figure VI-10: The Market for Corn--Supply and Demand Curves with a Price Floor P Q S D $10.00 $26.00 $2.00 100K a P F = $14.00 b c

31. Table VII-1.1: Changes in Market Concentration for Dominant Firms Over Time Firm Early Share % & Year Later Share % & Year Standard Oil88% 189967% 1909 American Sugar Refining95% 189275% 1894 American Tin Plate95% 189954% 1912 American Tobacco93% 189976% 1903 International Harvester85% 190244% 1922

32. Table VII-1.2: Dominant Firms and Market Share Over Time Firm1962 Mkt Share1982 Mkt Share RCA ( Color TVs ) 49% 20% Boeing ( WB Jets ) 51% 60% GM ( Autos ) 52% 46% GE ( Generators ) 59% 61% IBM ( Mainframes ) 60% 68% Kodak ( Film ) 85% 65% Harley-Davidson 100% 36% Xerox ( Copiers ) 100% 42%