Econ micro
Econ micro
Economic 复习整理
Micro【 录】
- Price mechanism
- Demand
-
- Supply
- Competitive market
- PED
- YED
- PES
- Government in Micro
- Market failure: Externalities + common pool resources
- Market failure: public goods
DEMAND
Demand is the amount of a good/service that a consumer is willing and able to purchase
at a given price in a given time period
◦ If a consumer is willing to purchase a good, but cannot a ord to, it is not e ective
demand【willing but 不能a ord = not e ective demand】
Law of demand: there is an inverse relationship between price and quantity demanded,
ceteris paribus
◦ When the price rises the QD falls
◦ When the price falls the QD rises
Market demand is the combination of all the individual demand for a good/service
◦ It is calculated by adding up the individual demand at each price level
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Assumptions
Diagram analysis:
- change in price will lead to change along the initial curve
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Non-Price determinants of demand
Income &
demand —>
direct
relationship
Change in Good& More Shift right Less Shift left
taste and services —> preferable
preference More
preferable
then demand
for them
increases
Advertisment
+ branding—>
change
preference
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Non price Explain Condition Shift Condition Shift
determinant
SUPPLY
Supply is the amount of a good/service that a producer is willing and able to supply at a
given price in a given time period
Rational pro t maximising producers would want to supply more as prices increase in
order to maximise their pro ts
The law of supply states that there is a positive (direct) relationship between quantity
supplied and price
Market supply is the combination of all the individual supply for a good/service
◦ It is calculated by adding up the individual supply at each price level
Price rises but costs do not change —> pro tability increases —> supply more ( increase
pro ts)
Assumption
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Factors:
◦ Changes to the costs of production
• price of raw materials / other COP change —-> rms respond by change in supply
• COP increase —>shift left
• COP decrease —> shift right
◦ Changes to technology
• Improvement in technology —> supply shift right
• Natural disasters may move the tech backwards —> shift left
◦ Changes to the number of rms
◦ Weather events
◦ Future price expectations
◦ Demand likely to rise —> supply ↑( ready to supply more in the future and gain
higher pro t)
◦ Goods in joint and competitive supply
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PRICE MECHANISM:
Price mechanism refers to the system where the forces of demand and supply determine
the priced of commodities and the changes therein. It is the buyers and sellers who actually
determine the price of a commodity.
通俗来说就是:move market into equilibrium
- Opportunity cost: is the next best alternative forgone. When a choice is made, there is
an opportunity cost.
MARKET EQUILIBRIUM
- supply equals to the demand
- Excess supply: More is being supplied than demanded at P1 → in order to eliminate the
surplus, producer must lower the price
- Excess demand: More is being demanded than supplied at P2 → in order to eliminate
this shortage, producer must raise the price
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MARKET EFFICIENCY
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Allocative ef ciency
Allocative efficiency happens when competitive market is in equilibrium,
where resources are allocated in the most efficient way from society’s
point of view.
• Social surplus (consumer + producer surplus) is maximized.
• Marginal social bene t = Marginal social cost
INDIRECT TAXES
Speci c ( xed amount) taxes and ad valorem (percentage) taxes and their
impact on markets
Aim of imposing indirect taxes:
1. To raise tax revenues → Government spending
2. Internalize externalities → Achieve socially optimal level of output
Types of indirect tax:
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Tax incidence differs depending on the PED & PES of the product:
• Tax incidence on producer: (P1-P3)xQ2
• Tax incidence on consumer: (P2-P1)xQ2
• Price of the product: rises from P1 to P2
PED & PES (of a product)
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• After the tax is imposed, the producer would like to raise the price up to P1
and pass on all the tax to consumers
• However, there is excess supply, and by market mechanism, price has to fall
and a new equilibrium P2Q2 is formed
• At price P2, quantity Q2 is both demanded and supplied
P2-P1 Tax incidence on consumer
If a good with inelastic demand is taxed, the tax burden can be easily
passed on to the consumer (PED is less than PES)
SUBSIDIES
Impact on markets
Subsidy: is an amount of money per unit of output paid by the
government to a firm.
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Supply curve shifts down because a subsidy reduces costs of production.
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3. Government: expenditure increases (take money away from other
areas of expenditure or raise taxes)
PRICE CONTROLS
Price ceilings (maximum prices): rationale, consequences and examples
Price ceilings (maximum prices): is a situation where government sets a
maximum price, below the equilibrium price to prevent producers from
raising the price above it.
• Set to protect consumers
• Usually in markets of necessity or merit goods (good that would be
underprovided if the market were allowed to operate freely)
• I.e. Maximum food price controls during food shortage?ensure low-cost food
for the poor.
• I.e. Maximum rent controls?ensure affordable accommodation for those on
low incomes.
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• Eventually consumption will fall from Qe to Q1, even though it is at a lower
price
• Consumer expenditure ( rm’s revenue) will decrease
Consequences of maximum price:
1. Shortages: leads to forming of black market/underground parallel market
(where product is sold at a higher price, somewhere between Pe and Pmax.)
2. Non-price rationing mechanisms: Long queues or reservations → can
determine the order in which consumers are served.
3. Welfare impacts: Producer surplus decreases, consumer surplus increase
4. Inef cient resource allocation: allocatively inef cient
Impacts on stakeholders:
1. Consumers: lower prices, but have to go through non-price rationing
mechanisms
2. Producers: lower selling price → revenue decreases
3. Government: increase spending on solving the consequences → subsidize or
direct provision to shift the supply curve to right → reduce government
expenditure in other areas → opportunity cost
Price oors (minimum prices): rationale, consequences and examples
Price floors (minimum prices): is a situation where the government sets a
minimum price, above the equilibrium price to prevent producers from
reducing the price below it.
• Set to protect producers of goods & services that government thinks are
important. i.e. agricultural products
• To protect workers by setting minimum wage → ensure workers earn enough
to lead a reasonable existence
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Consequences of minimum price:
1. Surpluses: producer will be tempted to get around the price controls and sell
their excess supply for a lower price, somewhere between Pmin & Pe.
2. Disposal of the surplus by the government
3. Welfare impact: producer surplus increases, consumer surplus decreases
4. Inef cient resource allocation: allocatively inef cient
Impacts on stakeholders:
1. Consumers: higher prices
2. Producer: higher selling price → less cost-conscious → inef ciency & waste
of resources OR producing more of protected product than other products that
they could produce more ef ciently
3. Government: increase spending on solving the consequences → store,
destroy or selling the surplus abroad (dumping → harm other domestic
industries → angry reaction from foreign governments) OR increase demand
by advertising or restricting supplies of imports through protectionist policies
(thus increase demand for domestic products)
Marginal social benefits: is the private benefit to the entity plus the
spill-over benefits to third parties of consuming or producing one
additional unit.
Marginal social costs: is the private costs to the entity plus the spill-
over costs to third parties of consuming or producing one additional unit.
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• When this is externality, the market does not achieve a social optimum where
MSB=MSC
• Negative externalities → also called spill-over costs or social costs
• Positive externalities → also called spill-over bene ts or social bene ts
i.e. Factory releasing poisoning materials that are harmful to the area;
Power house burning fossil fuels, releasing greenhouse gases that would
cause global warming.
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• There is a misallocation of resources: too much is being produced at a too low
price than is socially desirable.
• There is a welfare lost to society of the extra units from Qp to Qs because
MSC is greater than MSB (shaded area)
Negative externalities of consumption: is a harmful side effect to the
society due to the consumption by an individual.
i.e. Smokers giving passive smoking to other people, causing them to get
illnesses.
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• Positive externalities of production are sometimes created during the production of a
good/service
Diagram Analysis
•The marginal social bene t
(MSB) is assumed to be
equal to the marginal private
bene t (MPB) as the focus
is on the producer side of
the market
•The free-market equilibrium
can be seen at PeQe. This
is where the MPC = MSB
•The larger the external
bene ts in production, the
larger the gap between the
MPC and the marginal
social cost (MSC)
• The optimum allocation of resources from society’s point of view would generate an
equilibrium where MSB = MSC. This can be found at PoptQopt. There is no market
failure at this equilibrium
• The free market is failing due to under-provision of this good/service equal to Qopt -
Qe
• There is a welfare loss to society (pink triangle) as the external bene ts could be
further maximised
• To be socially e cient, more factors of production should be allocated to producing
this good/service
• There is an opportunity for government intervention (indirect taxes, legislation,
regulation etc.), to force this market to be more socially e cient
• Any intervention that reduces the welfare loss will be bene cial
Diagram Analysis
•MSC is assumed to be
equal to the MPC as the
focus is on the consumer
side of the market
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• The free-market equilibrium can be seen at PeQe. This is where the MPB = MSC
• The larger the external bene ts in consumption (positive externality), the larger the
gap between the MPB and MSB
• The optimal allocation of resources from society’s point of view would generate an
equilibrium where MSB = MSC. This can be found at PoptQopt. There is no market
failure here
• The free market is failing due to an under-consumption of this good/service equal to
Qopt - Qe
• More factors of production should be allocated to producing the optimal quantity as
societal welfare will be gained (pink triangle)
• There is an opportunity for government intervention (subsidies, partial provision etc.)
to force this market to be more socially e cient
• Any intervention that gains welfare will be bene cial
Government Intervention to Address the Market Failure
1. Indirect (Pigouvian) taxes
A Pigouvian tax is a tax placed on a product with harmful side e ects (named after
Arthur Pigou), so as to increase its price and reduce the quantity demanded or the
supply. Useful to address market failure where goods are over-provided
2. Carbon taxes
A tax that producers who emit greenhouse gases have to pay. It sets a price on the
carbon content forcing producers to pay for each ton of emissions. This raises their
costs of production and should reduce supply. Useful to address market failure in
markets where there's high a carbon footprint
3. Producer subsidies
The government gives rms a xed amount of money per unit produced in order to
lower production costs and/or increase output of the product. Useful to address
market failure where goods are under-provided or consumed
4. Legislation and regulation
The government creates new laws (e.g. no single-use plastic bags) and then creates
an agency (e.g. environment agency) to regulate those laws. Useful to address market
failure where goods are over-provided or consumed
5. Education
The government funds advertising and education programs to educate the public on
the dangers (or sometimes the bene ts) of certain products e.g. anti smoking
campaigns. Useful to address market failure caused by the existence of merit and
demerit goods
6. Tradable permits
A mechanism which provides rms who emit greenhouse gases the option to buy a
permit to pollute when it is required. This increases their costs of production and
should reduce supply. If rms have permits that are no longer needed they are able to
sell them to other rms
7. International agreements
These are useful for issues which are global in nature and require a globally
coordinated response e.g. COP 27 agreements on climate change. Useful to address
market failure where the tragedy of the commons is occurring and the global trade in
demerit goods
8. Collective self-governance
Occurs when communities come together to take control of common pool resources
in an attempt to deal with the negative externalities associated with their use
9. Government provision
Governments will often choose to directly provide certain goods/services (merit
goods) in order to ensure that everyone in society has the same access. Useful to
address market failure where goods are under-provided
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