Chapter Nine

Applying the Competitive Model

© 2007 Pearson Addison-Wesley. All rights reserved. 9–2

Figure 9.1 Consumer Surplus

5

4

3

2

1

p1

543210

CS2 = $1CS

1 = $2

E1 = $3 E

2 = $3 E3 = $3

Price = $3

q1

a

b

c

q, Magazines per week

q, Trading cards per year

DemandExpenditure, E

Consumersurplus, CS

Marginal willingness topay for the last unit of output

(a) David’s Consumer Surplus

Demand

(b) Steven’s Consumer Surplus

© 2007 Pearson Addison-Wesley. All rights reserved. 9–3

Application (Page 267) Willingness to Pay on eBay

Q, Number of wedding cake toppers July 2005

1 2 3 4 5 6 7

$?

$80$75

$70

$62

$51 $50

© 2007 Pearson Addison-Wesley. All rights reserved. 9–4

Figure 9.2 Fall in Consumer Surplus from Roses as Price Rises

Q, Billion rose stems per year

57.8

3230

1.160 1.25

b

a

A = $149.64 million

B = $23.2 million

C = $0.9 million

Demand

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Table 9.1 Effect of a 10% Increase in Price on Consumer Surplus (Revenue and Consumer Surplus in Billions of 2004 Dollars)

© 2007 Pearson Addison-Wesley. All rights reserved. 9–6

Page 272 Solved Problem 9.1

Q, Units per weekQ1

Q3

Q2

p1

p2

e1

e2e

3 DC

BA

Relatively inelastic demand (at e1)

Relatively elastic demand (at e1)

© 2007 Pearson Addison-Wesley. All rights reserved. 9–7

Figure 9.3 Producer Surplus

p*

Q*

Market supply curve

Q, Units per year

Market price

Variable cost, VC

Producer surplus, PS

(b) A Market’s Producer Surplus

4

3

2

1

43210

PS2 = $2 PS3 = $1PS1 = $3

MC2 = $2 MC3 = $3 MC4 = $4MC1 = $1

p

Supply

q, Units per week

(a) A Firm’s Producer Surplus

© 2007 Pearson Addison-Wesley. All rights reserved. 9–8

Page 275 Solved Problem 9.2

Q, Billion rose stems per year

E = $4.05 million30

21

0 1.16 1.25

Supply

b

a

D = $104.4 million

F

© 2007 Pearson Addison-Wesley. All rights reserved. 9–9

Figure 9.4 Why Reducing Output from the Competitive Level Lowers Welfare

Q, Units per year

Supply

Demand

p2

MC1 = p1

Q2

Q1

e1

MC2

e2

C

E

B

D

A

F

© 2007 Pearson Addison-Wesley. All rights reserved. 9–10

Figure 9.5 Why Increasing Output from the Competitive Level Lowers Welfare

Q, Units per year

Supply

Demand

p2

MC1 = p1

Q2

Q1

e1

MC2

e2

C

F

B

D E

A

G H

© 2007 Pearson Addison-Wesley. All rights reserved. 9–11

Figure 9.6 Effect of a Restriction on the Number of Cabs

(a) Cab Firm

q2

q1q, Rides per month

E1

D

S1

S2

E2

B

A

C

AC2

AC1 MC

e2

e1

p2

p1

p2

p1

(b) Market

n2q

1Q

2 = n2q

2Q

1 = n1q

1Q, Rides per month

© 2007 Pearson Addison-Wesley. All rights reserved. 9–12

Figure 9.7 Welfare Effects of a Specific Tax on Roses

Q, Billion rose stems per year

3230

21

0

= 11

1.16 1.25

e1

e2

D

S

Demand

C

E

B

A

F

= 11¢

S + 11¢

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Page 287 Solved Problem 9.3

Q, Billions of rose stems per year

39¢

30¢28¢

s = 11¢

1.25 1.34

e1

e2D

G

S

Demand

C

E

B

A

F

S 11¢

s = 11¢

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Figure 9.8 Effect of Price Supports in Soybeans

Qd = 1.9 Q1 = 2.1

G

D

Qs = 2.20

Q, Billion bushels of soybeans per year

Qg = 0.3

p1 = 4.59

3.60

Supply

Demand

Price support

e

F

B

MC

A

C

E

p = 5.00—

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Page 291 Solved Problem 9.4

2.1

G

D

2.2Q, Billions of bushels of soybeans per year

p1 = $4.59

p2 = $4.39

Supply

Demand

Price support

F

B

A

C

E

p = $5.00—

e1

e2

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Page 293 Solved Problem 9.5

Q, Units per year

p3

p1

p2

Qs = Q2Qd Q

1

e1

e2

Dp, Price ceiling–

C

E

B

A

F

Supply

Demand

© 2007 Pearson Addison-Wesley. All rights reserved. 9–17

Figure 9.9 Loss from Eliminating Free Trade

9.0 10.28.2 11.8 13.1

Q, Million barrels of oil per dayImports = 4.9

14.70

0

29.04

Sa = S2

S1, World price

e2

e1

D

B

A

C

Demand

© 2007 Pearson Addison-Wesley. All rights reserved. 9–18

Figure 9.10 Effect of a Tariff (or Quota)

9.08.2 11.8 13.1

Q, Million barrels of oil per dayImports = 2.8

0

14.70

19.70

29.04

Sa = S2

S3

Demand

S1, World price

e2

e3

e1

= 5.00

F G H

B

A

C ED

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Table 9.2 Welfare Cost of Trade Barriers (millions of 2005 dollars)