Theory Application In Competitive Markets Ir Muhril Ardiansyah

Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 1

n One the remarkable features of a perfectly competitive market: - in equilibrium. - a competitive market allocates resources efficiently. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 2

Excise Taxes n n Figure 10. 2 Page 358. Equilibrium With An Excise Tax. The effects of an excise tax are: - The market will under produce. - Consumer surplus will be lower than with no tax. - Producer surplus will be lower than with no tax. - There will be a deadweight loss. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 3

Excise Taxes (continued) n Deadweight Loss: a reduction in net economic benefits resulting from an inefficient allocation of resource. n Figure 10. 3. Page 360. Impact Of A $6 Excise Tax. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 4

Subsidies n Figure 10. 6. Page 366. Impact Of A $3 Subsidy. n The effects of a subsidy: - The market will overproduce. - Consumer surplus will be higher. - Producer surplus will be higher. - There will be a deadweight loss. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 5

Price Ceilings (Maximum Price Regulation) n n Sometimes a government may set a maximum allowable price in a market. If the price ceiling is below the equilibrium price in a market, the ceiling will have effects: - The market will not clear. There will be an excess demand. - The market will under produce. - Producer surplus will be lower. - There will be a deadweight loss. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 6

Price Ceilings (Maximum Price Regulation) (continued) n Figure 10. 7. Page 369 Impact Of Rent Controls. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 7

Price Floors (Minimum Price Regulation) n Government sometimes set minimum prices for goods or services. n When the government imposes a price floor higher than the free market price, the effects: - The market will not clear. There will be an excess supply of the good or service. - Consumers will buy less of the good than they would. - Consumer surplus will be lower. - There will be a deadweight loss. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 8

Price Floors (Minimum Price Regulation) n Figure 10. Page 377. Impact Of Minimum Wage Law. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 9

Production Quotas n If the government wants to support the price at a level above the equilibrium price in a free market, it may use a quota to restrict the quantity that producers can supply. n A quota is a limit on the number of producers in the market. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 10

Production Quotas (continued) n When the government imposes a quota in a market, we observe the effects: - The market will not clear. There will be an excess supply. - Consumers will buy less. - Consumer surplus will be lower. - There will be a deadweight loss. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 11

Production Quotas (continued) n Figure 10. 13. Page 384. Impact Of A 4 Million Unit Production Quota. Theory Application In Competitive Markets Ir. Muhril Ardiansyah, M. Sc. , Ph. D. 12