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Equilibrium

Equilibrium. Introduce supply Equilibrium The effect of taxes Who really “pays” a tax? The deadweight loss of a tax Pareto efficiency. Supply. Assume firms, as consumers, take the market price for the good they are selling as given and outside of their control: the market is competitive

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Equilibrium

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  1. Equilibrium • Introduce supply • Equilibrium • The effect of taxes • Who really “pays” a tax? • The deadweight loss of a tax • Pareto efficiency

  2. Supply • Assume firms, as consumers, take the market price for the good they are selling as given and outside of their control: the market is competitive • A firm’s supply function measures the quantity of a good that the firm supplies at a given price:

  3. Supply • In general, a firm’s supply increases with the good’s price: • An inverse supply function tells us what the price would have to be to get the producer to supply units of the good:

  4. Net Producer’s Surplus

  5. Changes in Net Producer’s Surplus

  6. Market Supply Curve

  7. Equilibrium • Consider the market for a good where market demand is and market supply is • Equilibrium price is a price such that:

  8. Equilibrium:

  9. Perfectly inelastic supply Perfectly elastic supply Special Cases

  10. Solving for Equilibrium: A Linear Example Suppose that demand and supply functions are linear: for some:

  11. Solving for Equilibrium: A Linear Example • Equilibrium: • Solve this equation for : • Solution:

  12. Demand Shift Supply Shift Comparative Statics

  13. Taxes • Let’s consider the gasoline market one more time • As of today the US government imposes a 15 cents tax per gallon of gasoline • Thus, there will be two prices on the market: price that the supplier gets price that consumer pays

  14. Equilibrium with Taxes • Quantity demanded depends on : • Quantity supplied depends on :

  15. Equilibrium with Taxes • Two equations: in two unknowns: • Combining them:

  16. Equilibrium with Taxes:

  17. Inverse Demand and Supply • Inverse demand function: • Inverse supply function: • Equilibrium:

  18. Equilibrium with Taxes:

  19. Equilibrium with Taxes:

  20. Passing Along a Tax: Consumers Pay the Tax:

  21. Passing Along a Tax: Producers Pay the Tax:

  22. Passing Along a Tax: Consumers Pay Almost All the Tax

  23. Passing Along a Tax: Producers Pay Almost All the Tax

  24. Deadweight Loss of a Tax: B+D

  25. Pareto Efficiency • An economic situation is Pareto efficient when there is no way to make any person better off without hurting anybody else. • Pareto efficiency and income distribution. • Is a competitive marketPareto efficient?

  26. Competitive Market and Pareto Efficiency

  27. Values Taxes • Equilibrium: • Inverse demand and supply:

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