Scribd
Upload
29 views

Demand and Supply Model: and Its Application - II

This document provides an outline for a lecture on demand and supply models and their applications. It includes sections on the basic demand and supply model, market equilibrium, consumer and producer surplus, competitive market efficiency, and major applications of demand and supply models. It discusses how competitive markets allocate resources efficiently and the roles of government in markets, including providing public goods and regulating externalities. Key applications covered are pricing with or without freight costs, effects of taxes on consumers versus suppliers, and impacts of tax policy changes.

Uploaded by

Jeffrey Lao
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
29 views

Demand and Supply Model: and Its Application - II

This document provides an outline for a lecture on demand and supply models and their applications. It includes sections on the basic demand and supply model, market equilibrium, consumer and producer surplus, competitive market efficiency, and major applications of demand and supply models. It discusses how competitive markets allocate resources efficiently and the roles of government in markets, including providing public goods and regulating externalities. Key applications covered are pricing with or without freight costs, effects of taxes on consumers versus suppliers, and impacts of tax policy changes.

Uploaded by

Jeffrey Lao
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 20

Demand and Supply Model

And its application --II

Course outline

Managerial Microeconomics

Basic Model

Managerial perspective

Additional topics
2

Lecture outline
Demand and Supply

Demand

supply

Market equilibrium

Law of demand

Law of supply

Producer surplus

efficiency

Consumer surplus

government

Paying vs. bearing

Comparative Statics analysis 3

3.1 Competitive Market efficiency

What is (socially) efficient resource allocation?

produce valuable goods at the To _______ the most _____ allocate lowest _______ cost possible, and _______ to those who ______ them the most. value

3.1 Competitive Market Efficiency


Profit maximize vs Social Optimal

1.

social optimal production rate Efficient __________

Marginal Benefit = Marginal Cost

Q
2.
firm production scale Efficient __________
Every firms have same marginal cost curve (As low cost as possible) -For firms with higer MC will produce less -Allocate to the ones who value the good most

q
5

3.1 Competitive Market Efficiency

How do competitive markets find out

what are most valuable goods? Who can produce those goods at lowest cost? Who value the goods the most?

What are the major application of D-S model?

What are the main roles of government in an economy?


1.Laws - Voluntary Exchange, Intellectual Right 2.Taxes - i) Redistribution ; ii) Control Negative Externalities 3.Money 4.Stability

-Protect private ownership -Protect fair competition, restrict market power -Intervene when there are externalities - Control pollution - Provides free eduction - High-speed railway -Provide public goods -There is no information asymmetry in perfect competitive market Regulate when there exists significant information asymmetry. - Food and drug safety - Stock market -Markets are not fair to people with less endownment - Social welfare program

10

Optional reading

Baye, chapter 14 page 507 to page 530.

13

Question

1.
2.

The more elastic the supply, the


more likely the government is to tax the product. larger the amount of any tax imposed on the product born by suppliers. smaller the amount of any tax imposed on the product born by suppliers. more elastic is the demand

3.

4.

14

3.3 D-S model application (3)paying vs. bearing


Pricing Issue A major issue for manufacturers of industrial goods such as cement is whether their prices should include the costs of shipment to the consumer. How would the market for cement be affected if manufacturers switched from pricing inclusive of freight to ex-works marginal cost curve will be down by the amount of freight, so as pricing? The the willingness to pay. (The equlibirun will depends on marginal
benefit)
15

3.3 D-S model application (3)paying vs. bearing


Price ($ per pound)

25 cents 25 cents

CF supply a b ex-works supply

1.50

CF demand ex-works demand

1 Quantity (Million pounds a year)

16

3.3 D-S model application (3)paying vs. bearing


Tax Governments all over the world depend on tax revenues to support public services. Some taxes are levied on consumers, others on businesses, and some are levied on both. For example, airport tax is levied on carriers in the U.S. but on passengers in Asia. What difference would it make if the U.S. government switched to the Asian system?

17

3.3 D-S model application (3)paying vs. bearing


$10 804 e b supply

800
794 $10 h

demand

900

920

Quantity (Thousand tickets a year)


18

3.3 D-S model application (3)paying vs. bearing

Assume that the carrots market in Hong Kong is perfectly competitive. Let QD=600-20P denote the market demand. QD is in million pounds a year. P is in dollar. Let QS=30P denote the market supply. What is the equilibrium price? If now the government imposes a tax on the sellers in the amount of $1 per pound carrots, what is the new price? What amount of the tax is borne by the sellers? If instead the government imposes a tax on the buyer in the amount of $1 per pound, what is the new price? What amount of the tax is borne by the buyers? Comment on the difference between the two scenarios.

19

3.3 D-S model application (3)paying vs. bearing

Paying a price bearing that amount How much each party bears is independent of who pays. How much each party bears depends on the elasticity of demand and supply. In general, the more flexible (elastic) is the less buyer/seller (demand/supply), the ____ the buyer/seller bears.
20

D-S model and Economic methodology

21

Topic Intended Learning Outcomes


2.1 Explain the law of demand and the law of supply, list factors influence demand and supply, and identify their application in business 2.2 Use equations and graphs to represent demand/supply and aggregate individual demand/supply to get market demand/supply. 2.3 Distinguish between normal and inferior good and identify its application in business. 2.4 Calculate consumer surplus/ producer surplus and identify its application in business.

22

Topic Intended Learning Outcomes


2.5 Explain how a market reaches equilibrium and calculate/predict competitive market price and quantity. 2.6 Explain why competitive markets are efficient. 2.7 Explain and use the four main applications of D-S Model
a) b) c) d)

Validate the importance of competition and markets in resource allocation. Identify areas and directions of government regulation. Distinguish paying vs. bearing Analyze changes in markets*

23

Preparing for next lecture

Read Chapter 3 up to page 95

24

You might also like