1. INTRODUCTION TO MICROECONOMICS
Graphs and Tables
Part #2

2. Table III-1: The Market for DVDs

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

4. Figure III-1.2: The Demand Curve and ElasticityP
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

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

6. 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 50

7. Figure III-3.1: The Elasticity of Demand and the Ease of SubstitutionP
$2.25
$2.00 D1 Q
,000
Q = Crest Toothpaste

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

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

10. Figure III-4.2: The Elasticity of Demand and the Time HorizonP
DLR Q

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

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

13. Table III-6.1: Imposing $20 Tax on Producers

14. Table III-6.1(a): Imposing $20 Tax on Producers

15. Figure III-6.1: The Final Burden of a TaxP D0
STAX=$20 S0 CB
P1 = $86 WL
P0 = $70
P2 = $66
$40 PB
$20 Q
Q1 = 920
1,000 = Q

16. 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?).

17. Table III-6.1(a): Imposing $20 Tax on Producers17

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

19. 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______.

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

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

22. 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?).

23. Table III-6.2: Imposing $20 Tax on Producers23

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

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

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

27. Figure III-6.3: Corporate Tax Rates

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

29. Figure III-7.2: Trends in Prices and ED Mentions for Cocaine and Heroin, 1981-1997
Author J. Caulkins uses DEA STRIDE Data.

30. Figure III-7.3: Estimated Methamphetamine Price per Pure Gram
Abt Associates Report on Illicit Drug Prices, 2001

31. Figure III-7.4: The Demand for Illegal DrugsP D Q
(a) Popular View P P P Q Q Q
Casual Users Compulsive Users Market Demand
(b) Economists’ View

32. Figure III-7.5: The Effect of Prohibition on the Market for Drugs in the Short-Run
$200 S0 $2 D Q
10m m
S0 = Legal Supply S1 = Illegal Supply

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

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

35. 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

36. Table IV-2: Effect of a Negative Externality on the Market for Paper

37. 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 = ,000 = Q0

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

39. 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

40. 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 = ,000 = Q0
Setting TAX = $20 shifts the Private Supply Curve
to the left to Obtain the Optimal Amount of Pollution

41. 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)

42. 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, 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

43. 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