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DEMAND Substitute slices of pizza for bottles. MARKET DEMAND Substitute slices of pizza for bottles. SUPPLY Substitute slices of pizza for bottles. MARKET SUPPLY Substitute slices of pizza for bottles. MARKET EQUILIBRIUM Substitute slices of pizza for bottles. Q demanded = Q supplied.

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Demand substitute slices of pizza for bottles

DEMANDSubstitute slices of pizza for bottles


Demand substitute slices of pizza for bottles

MARKET DEMAND

Substitute slices of pizza for bottles


Supply substitute slices of pizza for bottles

SUPPLYSubstitute slices of pizza for bottles


Market supply substitute slices of pizza for bottles

MARKET SUPPLYSubstitute slices of pizza for bottles


Market equilibrium substitute slices of pizza for bottles

MARKET EQUILIBRIUMSubstitute slices of pizza for bottles

Qdemanded = Qsupplied

“Economic Efficiency”

How demonstrate this?

Welfare Economics


Two ways to look @ demand curve

Two ways to look @ Demand Curve

Price

Price

“Willingness to Purchase”

“Willingness to Pay”

$2

$2

D

D

Quantity

3

Quantity

3


Willingness to pay

“Willingness to Pay”

Price willing to pay is a measure of the benefit received

Price

Because we are examining the last coke purchased, we are measuring the “MarginalBenefit” received from the last coke

Quantity


Marginal benefit

MARGINAL BENEFIT

Price

S

$1

D = MB

Quantity


Consumer surplus

Consumer Surplus

Price

Total of all marginal Benefits = Total Consumer Benefit

CONSUMER SURPLUS

$1

D = MB

Quantity


Producer surplus

Producer Surplus

Price

$1

Quantity


Producer surplus1

Producer Surplus

Price

S = MC

$1

PRODUCER SURPLUS

Quantity


Demand substitute slices of pizza for bottles

Price

S = MC

$1

PRODUCER SURPLUS

Quantity


Total social surplus

Total Social Surplus

Price

CONSUMER SURPLUS

TOTAL SOCIAL SURPLUS

$1

PRODUCER SURPLUS

Quantity


Proving efficiency of markets

Proving “Efficiency” of Markets

Price

CONSUMER SURPLUS

Reduction in Total Social Surplus

$2

$1

PRODUCER SURPLUS

Quantity


Proving efficiency of markets1

Proving “Efficiency” of Markets

Price

S = MC

MC > MB

Reduces total Social Benefit

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

D = MB

Quantity


Maximum social benefit @ market equilibrium

Price

S = MC

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

D = MB

Quantity

Maximum Social Benefit@ Market Equilibrium

“Efficiency of Markets”


What have we proven

Given

Society’s Demand

reflection (measurement) of how it values things

ie, how “willing to pay”

Costs of Producing

Then can not achieve

 Social Benefit, or happiness by

 Or  quantity produced

What Have We Proven?

Price

S = MC

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

D = MB

Quantity


Maximum social benefit @ market equilibrium1

Price

S = MC

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

D = MB

Quantity

Maximum Social Benefit@ Market Equilibrium

“Efficiency of Markets”

But,

What is Missing in this picture?


Other costs

Supply curve based on Production Costs

Labor, materials, depreciation

“write a check”

“Internal” Costs

BUT also

Environmental Costs

Pollution of air & water, loss of wetlands, soil damage from Irrigation

“External” to firm producing

But, “Real” costs to society

ATC

MC

Price

S = MC

$1

Quantity

Other Costs?


External costs

How Value ?

Chpt 6

Assume we have their value

Add to Firm’s Existing Costs

New Equilibrium

Higher Price

Lower Quantity

EXTERNAL COSTS

Price

S’ = MSC

S = MC

P2

p1

D

Quantity

q2

q1


How achieve lower quantity

Need Mechanism to Internalize “external” costs

Tax

 “market” based solution

How Achieve Lower Quantity?

Price

S’ = MC + tax = MSC

S = MC

P2

p1

Quantity

q2

q1


How achieve lower quantity1

Government Regulation

Both 1 & 2 are mechanisms to internalize “external” costs

How Achieve Lower Quantity?

Price

S’ = MSC

S = MC

p1

Quantity

q2

q1


Market equilibrium efficiency

Market Equilibrium & “Efficiency”

Price

S = MC

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

Accruing to owner or buyer

Marginal “private” benefits

D = MB

Quantity


Other benefits

Third Party Benefits

(people not involved in market transaction)

People living around

airports

universities

parks

“Social Benefits”

EXTERNAL BENEFITS

(external to the market)

How value?

Chpt 6

How Achieve larger Q?

Market Equilibrium & “Efficiency”

Other Benefits?

Price

S = MC

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

D’ = MSB

D = MPB

Marginal private benefits

Quantity

q1

q2


How achieve larger q

Need Mechanism to Internalize “external” benefits

 Cost to Supply the good:

Tax breaks

Subsidies

airports

land preserves

parks

How Achieve larger Q?

Price

S = MC

CONSUMER SURPLUS

P1

PRODUCER SURPLUS

P2

D = MB

Quantity

q2

q1


Figure 3 1 automobile market with external costs

Figure 3-1: Automobile Market with External Costs


Figure 3 2 automobile market with pollution tax

Figure 3-2: Automobile Market with Pollution Tax


Figure 3 3 a positive externality

Figure 3-3: A Positive Externality


Figure 3 4 a subsidy for open and rural land use

Figure 3-4: A Subsidy for Open and Rural Land Use


Figure 3 6 welfare analysis of the automobile market with pollution costs

Figure 3-6: Welfare Analysis of the Automobile Market with Pollution Costs


Efficiency with externalities

“Efficiency” with Externalities

the case of “Optimal” pollution

Price

S’ w/ external social costs

Up to q1 pollution permitted

Social benefits of driving

> combined costs of production & pollution

S = MpC

p0

D = MpB

Quantity

q1

q0


Implication of demand for cars

 “optimal pollution permitted.

Ironic conclusion of Traditional Environmental Econ based on Neoclass market economics

We’ve used econ theory to prove  pollution OK!

Implication of  demand for cars?

Price

S’ w/ external social costs

S = MpC

p0

D’

D = MpB

Quantity

q1

q0


Demand substitute slices of pizza for bottles

Lecture 4 Discussion Question

Should our goal be to reduce pollution by 50%, 75%, or 100% ??

Explain your answer.


Demand substitute slices of pizza for bottles

Price

S = MC

CONSUMER SURPLUS

$1

PRODUCER SURPLUS

D = MB

Quantity


Demand substitute slices of pizza for bottles

Price

Total of all marginal Benefits = Total Consumer Benefit

Quantity


Demand substitute slices of pizza for bottles

MC

ATC


Figure 3 5 welfare analysis of the automobile market

Figure 3-5: Welfare Analysis of the Automobile Market


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