Term Paper on Microeco

7/31/2019 Term Paper on Microeco

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U N I V E R S I T Y O F D H A K A

BBA 17TH BATCH

TER M PAPE R ON

MICROECONOMICS


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Term Paper on

MICROECONOMICS

Prepared for

M. Nasiruddin

Prefessor Honorary

Department of Finance

University of Dhaka

Prepared by

Niaz Mohammad Solaiman

Roll: 17-018


University of Dhaka

Course Title: Microeconomics

Course Code: F-106

Date of Submission: 17th

December 2011


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Letter of Transmittal

December 17, 2011

M. Nasiruddin

Professor Honorary


University of Dhaka

Sir:

Here is the Term Paper on the study of Microeconomics that you assigned as on

November 15.

The study tells about economic efficiency, government price setting and taxes.

From this study we will come to know about the consequences of interventions

such as consumers surplus, producers surplus, efficiency of the competitive

markets, government intervention on the market, price floors, price ceilings and

the effect of taxes. The study tells us much about the importance as well as the

effects of microeconomics.

I am grateful for assigning me the mentioned topic and to study about what I am

assigned. If you need any additional data or assistance regarding the topic, please

contact with me.

Sincerely yours,

Niaz Mohammad Solaiman

Roll: 17-018


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Executive Summary

This term paper is done for several objectives regarding microeconomics. As

Microeconomics is read widely throughout the whole world it has a great

importance and impact on the social and economic life of the human. In this

report, economic efficiency, consequences of the government intervention,

producers surplus, consumers surplus and other effects are briefly discussed. So

the report not only gives us the basic idea about the microeconomic efficiency but

also represents and helps us to find the ways of calculating different surpluses

and taxes for social use. Some mathematical calculations are also shown on the

report and that are of great importance.


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Economic Efficiency,

Government Price Setting

and Taxes

Introduction

Incidentals of Authorization and Submittal

This study on the economic efficiency, government pricing and taxes is submitted

to M. Nasiruddin, Professor Honorary, Department of Finance, University of

Dhaka, on December 17, 2011. As authorized on November 15.

Objectives of the Study

This is the study where the importance is given on the economic consequences on

government pricing, taxes and the economic efficiency. The main objective of this

paper is to know about the calculations for finding out surpluses, taxes and other

economic effects that will help us on increasing our knowledge and to fulfill our

course.


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Analysis of the Work

During this study activities were grouped together into six parts:

Introduction

Consumer surplus

Producer surplus.

Efficiency of competitive markets.

Price floors and price ceilings.

Economic impact of taxes.

Introduction Under perfect competition a market without intervention reaches

equilibrium:

The quantity of goods consumers are willing to buy equals the

quantity of goods firms are willing to sell.

In real world, government intervenes markets:Price ceilingsPrice Floors

Taxes What are the consequences of interventions?

Consumer, producer and economic surpluses


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Consumer Surplus Demand curves show willingness of consumers to purchase a product at

different prices.

Another way to see the demand curve:

Demand curve shows at each point what is the additional benefit to a

consumer in the market from consuming one more unit.

Demand curve depicts the marginal benefit at different prices.

Example

4 consumers in the tea market.


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Difference between highest price a consumer is willing to pay (benefit

received from consumption) and price that actually pays.

How much would you pay for a piece of handicraft?

How to estimate Consumer Surplus in a market?

Demand curves.


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Usually there are many consumers in markets, and demand curves aresmooth lines.

CS is area below curve and above price.

Producers Surplus What are the supply curves showing to us?

The willingness of firms to supply a product at different prices.

What this willingness depends on?

Firms observe price in the market, compare it with production costs

and decide to produce or not.

Then, willingness to supply depends on cost of production.

When are firms willing to supply an extra unit?

Only when they recover the additional cost of producing that lastunit.

When price is higher or equal to marginal cost


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Supply curve is also the marginal cost curve.

Marginal cost increases as more resources are used.

Supply curves are usually upward sloping.


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Economic Surplus is the sum of consumer surplus and producer surplus.

In a competitive market, economic surplus is at maximum when the market

is in equilibrium.

Deadweight loss: The reduction in economic surplus resulting from a

market not being in competitive equilibrium.


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Consumer Surplus measures the benefit to consumers from buying a

particular good.

Producer Surplus measures the benefit to firms from selling a particular

good. Then, Economic Surplus is the best measure we have of the benefit to

society from the production of a good.

Equilibrium in a competitive market results in the greatest amount of total

net benefit to society, from the production of a good or service.

Economic efficiency

A market outcome in which the marginal benefit to consumers of the last

unit produced is equal to its marginal cost of production, and in which the

sum of consumer surplus and producer surplus is at a maximum.

Government Intervention in the Market

Consumers and firms can ask the government to legally change the prices

set in the competitive markets.

Rent control apartments

Price floor in agricultural markets

Minimum wage

What is the effect of these interventions in the markets?

Price Floors

Price Ceilings


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Price Floors

Government policy in agricultural markets


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Price Ceilings

Government rent control policy in housing markets


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When the government imposes price floors or price ceilings:

Some people win.

Some people lose.

There is a loss of economic efficiency

Economic Impact of Taxes Government uses taxes to collect money or to discourage the consumption

of some goods.

Impact of taxes on economic efficiency.

Federal tax of $1-per-pack on cigarettes, paid by sellers.


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Imposition of taxes reduces Consumer Surplus and Producer Surplus.

Part of this reduction goes to government as tax revenue.

The rest is lost: deadweight loss.

True burden of a tax is not only tax paid, but also the deadweight loss.

Excess burden of the tax A tax is efficient if it imposes a small excess burden relative to the tax

revenue it raises.

Who Actually Pays Tax Whoever is legally required to pay the tax is not necessarily who actually

bears the burden of the tax.

Actual division of the burden of the tax: tax incidence

Consumers pay 8 cents, producers 2 cents.


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What happens if the consumers are legally required to pay the tax instead

of producers?


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Quantitative Analysis

Demand and Supply Equations

QD = 3,000,000 -1,000P

QS = 450,000 +1,300P Equilibrium condition: QD= QS

Solving:

3,000,000 1,000 P =450,000 + 1,300 P

3,450,000 = 2,300 P

P = 3,450,000 2,300

P = $1,500

To find quantity of equilibrium, we replace P in any equation

QD = 3,000,000 1,000*(1,500)

QD = 1,500,000

QS = 450,000 + 1,300*(1,500)

QS = 450,000 + 1,950,000

QS = 1,500,000

With the demand and supply equation we can find the intercepts in the

vertical axis by replacing Q by zero

Demand: (0) = 3,000,000 1,000P

1,000P = 3,000,000

P = 3,000,000 1,000

P = 3,000

Supply: (0) = 450,000 + 1,300P1,300P = 450,000

P = 450,000 1,300

P = 346.15


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In the same way, for every price or quantity given, we can find the

corresponding quantity or price along the curve, just by plugging the known

value in the equation

QD = 3,000,000 1,000P(10,000) = 3,000,000 1,000P

1,000P = 3,000,000 10,000 = 2,990,000

P= 2,990,000 1,000

P= 2,990

QS = 450,000 + 1,300P

QS = 450,000 + 1,300(1,000)

QS = 1,300,000 450,000

QS = 850,000

Consumer Surplus = (1,500 x 1,500,000) 2 = $1,125,000,000

Producer Surplus = (1,154 x 1,500,000) 2 = $ 865,500,000


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Consumer Surplus = $1,125,000,000 + A B

= $1,125,000,000 + ($425,000,000) ($211,250,000)

= $1,338,750,000

Producer Surplus = $865,500,000 C A= $865,500,000 ($162,500,000) ($425,000,000)

= $278,000,000

Deadweight Loss = B + C = $211,250,000 + $162,500,000

= $373,750,000


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Term Paper on Microeco

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