N.

Gregory Mankiw

Principles of
Economics Sixth Edition

7
Consumers, Producers, and the
Efficiency of Markets Premium PowerPoint
Slides by
Ron Cronovich
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
 Evaluating the Market Equilibrium
- Willingness to Pay (WTP) P
- Willingness to Sell (WTS)
- Marginal Buyer/Marginal Seller S

CS
Total surplus
= CS + PS PS

D
Q

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
2
product or service or otherwise on a password-protected website for classroom use.
 Theory of market efficiency
1. Free markets allocate the supply of P
goods to the buyers who value them
most highly, as measured by their
S
willingness to pay
2. Free markets allocate the demand CS
for goods to the sellers who can
produce them at the lowest cost PS
3. Free markets produce the quantity
of goods that maximize the sum of D
consumer surplus and producer Q
surplus

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
3
product or service or otherwise on a password-protected website for classroom use.
 N. Gregory Mankiw

Principles of
Economics Sixth Edition

8
Application:
The Costs of Taxation Premium PowerPoint
Slides by
Ron Cronovich
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
 The Effects of a Tax
P

Revenue from tax:

$T x QT Size of tax = $T
PB S

PE

PS D

Q
QT QE

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
5
product or service or otherwise on a password-protected website for classroom use.
 The Effects of a Tax
P
Without a tax,
CS = A + B + C
PS = D + E + F A
Tax revenue = 0 S
B C
Total surplus PE
D E
= CS + PS
=A+B+C D
F
+D+E+F

Q
QT QE

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
6
product or service or otherwise on a password-protected website for classroom use.
 DWL and the Elasticity of Supply & Demand

=> The more elastic is demand or supply (or the greater the elasticity of
demand and supply), the greater the DWL.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
7
product or service or otherwise on a password-protected website for classroom use.
 N. Gregory Mankiw

Principles of
Economics Sixth Edition

9
Application:
International Trade Premium PowerPoint
Slides by
Ron Cronovich
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
product or service or otherwise on a password-protected website for classroom use.
 The World Price and
Comparative Advantage

 PW = the world price of a good,

the price that prevails in world markets
 PD = domestic price without trade
 If PD < PW,
 country has comparative advantage in the good
 under free trade, country exports the good
 If PD > PW,
 country does not have comparative advantage
 under free trade, country imports the good
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
9
product or service or otherwise on a password-protected website for classroom use.
 A Country That Exports Soybeans
Without trade,
PD = $4 P Soybeans
Q = 500
exports S
PW = $6
$6
Under free trade,
 domestic $4
consumers
demand 300
D
 domestic producers Q
supply 750 300 500 750
 exports = 450
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
10
product or service or otherwise on a password-protected website for classroom use.
 ACTIVE LEARNING 1
Answers

Without trade, P Plasma TVs

CS = A
S
PS = B + C
Total surplus gains
A
=A+B+C from trade
$3000
With trade, B D
CS = A + B + D $1500
C imports D
PS = C
Total surplus Q
=A+B+C+D
© 2012 Cengage Learning. All Rights Reserved.
© 2012
MayCengage
not be copied,
Learning.
scanned,
All Rights
or duplicated,
Reserved.inMay
whole
not or
bein
copied,
part, except
scanned,
for or
useduplicated,
as permitted
in whole
in a license
or in part,
distributed
exceptwith
for use
a certain
as
11
product or service or otherwise on a password-protected
permitted in website
a licensefor
distributed
classroomwith
use.a certain product or service or otherwise on a password-protected website for classroom use.
 Tariff: An Example of a Trade Restriction
 Tariff: a tax on imports or Import Quota (limitation to the amount
of imported goods)
 Example: Cotton shirts
PW = $20
Tariff: T = $10/shirt
Consumers must pay $30 for an imported shirt.
So, domestic producers can charge $30 per shirt.
 In general, the price facing domestic buyers & sellers equals (PW +
T ).

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
12
product or service or otherwise on a password-protected website for classroom use.
 Analysis of a Tariff on Cotton Shirts
Free trade P
Cotton shirts
deadweight
CS = A + B + C
loss = D + F
+D+E+F
PS = G S
Total surplus = A + B
+C+D+E+F+G
A
Tariff
B
CS = A + B $30
PS = C + G C D E F
$20
Revenue = E G
D
Total surplus = A + B Q
+C+E+G 25 40 70 80
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
13
product or service or otherwise on a password-protected website for classroom use.
 Analysis of a Tariff on Cotton Shirts
D = deadweight loss P
Cotton shirts
deadweight
from the
loss = D + F
overproduction
of shirts S
F = deadweight loss
from the under- A
consumption
B
of shirts $30
C D E F
$20
G
D
Q
25 40 70 80
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain
14
product or service or otherwise on a password-protected website for classroom use.