Eaton Micro 6e Ch09

7/27/2019 Eaton Micro 6e Ch09

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2005 Pearson Education Canada Inc.9.1

Chapter 9

Applications of the

Competitive Model


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Figure 9.1 The supply and demand model


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Demand and Supply

Increases in demand lead to movementsalong the supply curve (given an upwardsloping supply curve) to an increased

equilibrium price and quantity. Increases in supply lead to movements

along the demand curve (given adownward sloping demand curve) anincreased equilibrium quantity but adecreased equilibrium price.


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Figure 9.4 Optimal heating in identical homes


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Figure 9.5 Optimal heating in different homes


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Figure 9.6 The economies of a quota


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From Figure 9.6

An effective quota reduces the quantitysupplied and raises the price to consumers.

The quota allows the farmers to earn economicrent, (a return above the opportunity cost).

The value of the quota increases the costs ofentering the industry and when a quota is soldto another farmer, the value is transferred

completely to the original farmer. This is calledthe transitional gains trap.


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Figure 9.7 The economies of rent control


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Potential Effects of Rent Control

Tenants who occupy apartments when rentcontrol is established will benefit.

All landlords will be worse off and some will be

induced to reduce supply. As a result of reduced supply, some renters

are worse off.

The way available apartments are allocatedimposes costs on suppliers and renters andthe allocation is not Pareto-optimal.


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Figure 9.8 The effect of a tax on producers


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From Figure 9.8

A per-unit tax increases the equilibriumprice by less than the tax.

The tax creates a deadweight loss as itreduces consumer and producer surplus.

The amount of the tax paid by consumersand producers depends upon the relativeelasticities of demand and supply.


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Figure 9.9 Elasticity of demand and per-unit taxes


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Figure 9.10 The effect of a tax on consumers


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Figure 9.11 The effect of a tariff on shoes


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Figure 9.12 The market for wives


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Figure 9.13 The equilibrium amount of crime


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From Figure 9.13

The demand curve for crime shows thedeclining marginal benefits of a crime asfunction of the number of crimes.

The supply curve of crime slopes upwards,showing rising marginal costs. A major costbeing foregone income from legitimateemployment (persons with low alternativeearnings are the first to turn to crime).

In equilibrium, the quantity of crime is wherethe marginal benefits and marginal costs meet.


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The Economic of Crime

The model suggests two methods toreduce crime:

1. Reduce the net benefits of crime(impose stiffer penalties andincrease law enforcement).

2. Raise the opportunity cost (increasejob opportunities and raise socialsafety nets).

Eaton Micro 6e Ch09

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