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Elasticity of Market Supply:Welfare loss if price is held below market-clearing level

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Microeconomics ­ECO402
VU
Lesson 27
Welfare loss if price is held below market-clearing level
Price
S
When price is
B
regulated to be no
higher than P1, the
P
deadweight loss given by
C
A
triangles B and C results.
P
D
Q
Q
Quantity
When price is
regulated to be no
Price
lower than P2 only Q3
will be demanded. The
deadweight loss is given
S
by triangles B and C
P
A
B
What would the deadweight
P
C
loss be if QS = Q2?
D
Quantity
Q
Q
Q
Welfare loss if price is held above market-clearing level
131
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Microeconomics ­ECO402
VU
Minimum Prices
Periodically government policy seeks to raise prices above market-clearing levels.
We will investigate this by looking at a price floor and the minimum wage.
Price Minimum
If producers produce Q2, the amount
Price
Q2 - Q3 will go unsold.
S
The change in producer
surplus will be
Pmin
A - C - D. Producers
A
may be worse off.
B
P0
C
D
D
Quantity
Q3
Q0
Q2
132
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Microeconomics ­ECO402
VU
The Minimum Wage
Firms are not allowed to
w
pay less than wmin. This
results in unemployment.
S
wmin
A
The deadweight loss
B
w
is given by
C
triangles B and C.
Unemploymen
D
L
L
L
L
Airline Regulation
During 1976-1981 the airline industry in the U.S. changed dramatically.
Deregulation lead to major changes in the industry.
Some airlines merged or went out of business as new airlines entered the industry.
Effect of Airline Regulation by the Civil Aeronautics Board
Prior to deregulation
S
price was at Pmin and
Price
QD = Q1 and Qs = Q2.
Area D is the cost
Pmin
of unsold output.
A
B
P0
After deregulation:
C
Prices fell to PO. The
change in consumer
surplus is A + B.
D
D
Quantity
Q1 Q3 Q0
Q2
133
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor