1. INTRODUCTION TO MICROECONOMICS Graphs and Tables Part #2

2. Table III-1: The Market for CDs

3. Figure III-1.1: Calculating the Elasticity of Demand for CDs Q P $20.00 D 90 10045 55 0 10 $18.00 $11.00 $9.00 $2.00 $0.00 a b e c f g Calculate E D for (1) Arc ab, (2) Arc ce, and (3) Arc fg

4. Table III-1.2: The Demand Curve and Elasticity Q P $20 $10 50100 E D = 1 E D < 1 E D > 1 E D > 1 : Elastic Portion of the Demand Curve E D = 1: Unit Elastic Point on the Demand Curve E D < 1: Inelastic Portion of the Demand Curve

5. Figure III-1.3: Calculating the Elasticity of Supply for CDs Q P S $2.00 $4.00 0 20 40 60 a b Arc a to b, E S = 3.0 (Why?) Arc b to c, E S = ? Arc c to d, E S = ? $6.00 c $8.00 d

6. Figure III-2.1: The Five Demand Curves DD D D D Q P Q P Q P P Q P Q 100 (a) $4 $5 90 100 (b) $4 $5 $4 $5 80 100 (c) 50 100 (d) $4 $5 $4 50 100 (e)

7. Explanation of Figure III-2.1 –(1) Perfectly Inelastic Demand: E D = 0 (Why?) Note: Demand Elasticity is zero on all arcs –(2) Relatively Inelastic Demand: E D = 9/19 < 1 (Why?) Note: Demand Elasticity decreases as quantity increases but is always less than one. –(3) Perfectly Unit Elastic Demand: E D = 1.0 (Why?) Note: Demand Elasticity is one on all arcs. –(4) Relatively Elastic Demand: E D = 3.0 (Why?) Note: Demand Elasticity decreases as quantity increases but is always greater than one. –(5) Perfectly Elastic Demand: E D = Infinity (Why?) Note: Demand Elasticity is infinite on all arcs.

8. Figure III-2.2: The Five Supply Curves S S Q P Q P Q P P Q P Q 100 (a) $4 $5 90 100 (b) $4 $5 80 100 (c) 50 100 (d) $4 $5 $4 50 100 (e) S S S $5 $4

9. Explanation of Figure III-2.2 –a) Perfectly Inelastic Supply: E S = 0 (Why?) Note: Supply Elasticity is zero on all arcs –b) Relatively Inelastic Supply: E S = 9/19 < 1 (Why?) Note: Supply Elasticity increases as quantity increases but is always less than one. (Why?) –c) Perfectly Unit Elastic Supply: E S = 1.0 (Why?) Note: Supply Elasticity is one on all arcs. (Why?) –d) Relatively Elastic Supply: E S = 3.0 (Why?) Note: Supply Elasticity decreases as quantity increases but is always greater than one. (Why?) –e) Perfectly Elastic Supply: E S = Infinity (Why?) Note: Supply Elasticity is infinite on all arcs.

10. Figure III-3: The Relation Between Total Revenue and Price Q P $20.00 80 90 100 50 0 10 20 $18.00 $2.00 $0.00 a b e c $10.00 $16.00 h k E D = 1 E D > 1 E D < 1

11. Figure III-4: The Elasticity of Demand and the Ease of Substitution P Q P Q D1D1 D0D0 $2.00 $2.25 500 1,000 Q = Crest Toothpaste 19K 20K $2 $6 Q = Gasoline (a) (b)

12. Figure III-5: The Elasticity of Demand and the Time Horizon D SR DLRDLR Q P

13. Figure III-6: Illustrating the Determinant of the Elasticity of Supply P Q S SR S LR

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

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

16. Figure III-6.1: The Final Burden of a Tax S0S0 S TAX=$20 $20 $40 P 0 = $70 P 1 = $86 P 2 = $66 P Q 1,000 = Q 0 1350Q 1 = 920 CB = (P 1 – P 0 )Q 1 = ($86 -$70)920 = $14,720 WL = 1/2(80)($20) = $800 PB = (P 0 – P 2 )Q 1 = ($70 - $66)920 = $3,680 TaxRev = T (Q TAX ) = ($20) 920 = $18,400 Note that TaxRev = CB + PB. D0D0 CB PB WL

17. Explanation of Symbols –P 0 = Price to Consumers and Producers Before the Tax –P 1 = Price to Consumers and Producers After the Tax –P 2 = Net Price to Producers After Tax is Paid to the Government –CB = (P 1 – P 0 )Q 1 = Consumers’ Final Burden of the Tax –PB = (P 0 – P 2 )Q 1 = Producers’ Final Burden of the Tax

18. Elasticity Explanation of the Final Burden of the Tax for Figure III-6.1 –E D = 86/184

19. Elasticity Explanation of the Final Burden of the Tax for Figure III-6.1 E S TAX = 344/184 Conclusion: E S TAX > E D. Therefore______.

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

21. Figure III-6.2: The Final Burden of a Tax D1D1 S0S0 S TAX=$20 $20 $40 P 0 = $70 P 1 = $80 P 2 = $60 $120 P Q 1,000 = Q 0 Q 1 = 800 WL CB = (P 1 – P 0 )Q 1 = ($80 -$70)800 = $8,000 WL = 1/2(200)($20) = $2,000 PB = (P 0 – P 2 )Q 1 = ($70 - $60)800 = $8,000 TaxRev = T (Q TAX ) = ($20) 800 = $16,000 Note that TaxRev = CB + PB. CB PB

22. Elasticity Explanation of the Final Burden of the Tax for Figure III-6.2

23. Elasticity Explanation of Final Burden of the Tax for Figure III-6.2 –E S TAX = 2 –Conclusion: E D = E S TAX = 2. Therefore ______.

24. Figure III-9: The Demand for Illegal Drugs P Q D (a) Popular View P Q P Q P Q Casual Users Compulsive Users Market Demand (b) Economists’ View

25. Figure III-10: The Effect of Prohibition on the Market for Drugs Q P D S0S0 S1S1 $2 $200 10m 12m S 0 = Legal Supply S 1 = Illegal Supply

26. Figure III-11: Illustration of the Social Control of Drugs P 1 SC 1 F N (a)Legal Use (b) Prohibition P 2 =SC 1 F (1) (2) (3)(1) (3) N (1) Non-Use (2) Acceptable Use (3) Unacceptable Use N = Number, F = Frequency

27. Figure IV-1: The Paper Mill and The Farmer Paper Mill Farmer River 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. Question: Why does the Paper Mill dump its wastes in the river?

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

29. Figure IV-2.1 The Effect of a Negative Externality on the Paper Market Q PAPER P D S PV T S SO C $120 P 1 = $80 P 0 = $70 $40 $20 Q 1 = 800 1,000 = Q 0

30. Figure IV-1.2 The Welfare Loss of a Negative Externality Q PAPER P D S PV T S SO C $120 P 1 = $80 P 0 = $70 $40 $20 Q 1 = 800 1,000 = Q 0 $90 CS PS WL WL = ½(200)($90 - $70) = $2,000

31. Figure IV-2.3: Explanation of the Welfare Loss Caused by a Negative Externality 1 = Area 1 = Area under the Demand Curve = Value of goods in this market gained by consumers 800 1,000 $80 $70 2 = Area 2 = Area under the Supply Curve = Value of goods lost in other markets in order to increase output in this market by 200 units. $80 $90 800 1,000 3= Area 3 = Area 2 - Area 1 = Welfare Loss

32. Figure IV-2.4: The Institutional Context Matters Pursuit of Self-Interest Undesirable Results Commons Pursuit of Self-Interest Property Rights Desirable Results

33. 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 –C PM = Costs to the Paper Mill to Install Pollution Control Equipment –C F = Costs to the Farmer of Cleaning the Water Used for Irrigation (Filters, Chemicals) –D = $20,000 C PM = $50,000 C F = $10,000 Paper Mill (PM) Farmer (F) Do Nothing Clean the Water Do Nothing Clean the Water F = $30,000 PM = $200,000 F = $40,000 PM = $200,000 F = $50,000 PM = $150,000 (1)(2) (3) F = Farmer’s Profits PM = Paper Mill’s Profits

34. Figure IV-3: The Four-Good Rectangle Private Goods Toll Goods Public Goods Common Pool Goods Degree of Exclusion lowhigh Degree of Rivalry high low

35. TableIV-4.1: The Co-operative Solution FARMERCOST BENEFITSNET BENEFITS A $500$1,500$1,000 B C TOTAL $500 $1,500 $4,500 $1,500 $1,000 $3,000 $1,000

36. Table IV-4.2: The Free-Rider Solution FARMERCOST BENEFITSNET BENEFITS A $1,000$1,100$100 B C TOTAL $0 $1,000 $1,100 $3,300 $1,100 $2,300 $1,100 NOTE: This solution becomes more likely as the number of farmers increases.