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Session 3
Hongyanto Setio, MBA
1
Agenda
Solve 2 linear equations (2 unknowns) and illustrate the
solution graphically
Solve 3 linear equations (3 unknowns)
Equilibrium price and quantity in the goods market
Equilibrium in labour market
Price controls
Tax, subsidies and their distribution
Break-even analysis
2
Solving 2 linear equations + Graph
Example:
1) 2X+3Y = 12.5
2) -X + 2Y = 6
Solution:
1) 2X + 3Y = 12.5
2) x 2 -2X + 4Y = 12
7Y = 24.5
Y=24.5/7=3.5
Subtitute Y=3.5 in equation 2) -X + 2(3.5) = 6
X=7–6=1
X = 1 and Y = 3.5
3
y-axis
7
4
(1,3.5)
3
2 (2.5,2.5)
1
-4 -3 -2 -1 0 1 2 3 4 5 x-axis
5
Equilibrium price and quantity
in the goods market
(Pe, Qe)
120
100 Given:
80 Qd = 200-2Pd
Price
60 Qs = -20+2Ps
Demand Curve
40 Supply Curve Calculate Pe & Qe
20
0
0 50 100 150 200 250
Quantity
6
Equilibrium in labour market
(We, Le)
12
Terbalik
10
8 Given:
Wage
6 Wd = 9-0.6Ld
Labour Demand
4 Labour Supply Ws = 2+0.4Ls
2 Calculate We & Le
0
0 5 10 15 20 25
Labour
7
Price controls
Price ceilings
The price is not allowed to go above the maximum or “ceiling” price
Imposed by the government to protect consumers because the P e is
considered too high
Leads “black market” worked example 3.9 page 115
Price floors
The price is not allowed to go below the minimum or “floor” price
Imposed by the government to protect producers because the P e or We is
considered too low
Minimum wage laws worked example 3.10 page 116
8
Taxes, Subsidies, and their Distribution
Fixed Tax per unit of output
The supply curve will shift to the left.
Consumer will pay the new Pe (higher than Pe) and Producer receives the new
Pe minus tax (lower than Pe).
worked example 3.12 page 121
Subsidies
The supply curve will shift to the right.
Consumer will pay the new Pe (lower than Pe) and Producer receives the new
Pe plus subsidy (higher than Pe).
worked example 3.13 page 123
Distribution of taxes/subsidies (for linear function)
% tax/subsidies paid/received by Consumer: |m d|/(|md|+|ms|)
% tax/subsidies paid/received by Producer |m s|/(|md|+|ms|)
9
Effects of fixed tax per unit of output
Qd = 200-2Pd
120
100
Qs = -20+2Ps
80
60
Price
Demand Curve
40 Supply Curve
20
0
0 50 100 150 200 250
Quantity
• Tax $6/unit
• Because of tax, the producer will get less money/motivation to
produce supply function will shift to ......
Qs = -20+2(Ps-6)
10
Effects of fixed tax per unit of output
Qs = -32+2Ps
Qs = -20+2Ps
Consumer P=58
55
Producer P=52
Qd = 200-2Pd
12
Break-even Analysis
TC TR TR = 3 Q
45
40
Break-even point
35 TC = 10 + 2 Q
TC = TR = 30
25
20
15
At break-even, Q = 10
10
5
0 Q
0
10
12
14 13
Problem Example
15
Producer Surplus
Producer Surplus: The difference between the revenue that the
producer receives and the revenue that the producer was willing to
accept
Example:
Calculate the producer surplus
(PS) when the price = $55 /unit
16
Consumer & Producer Surplus at Market
Equilibrium (W.E. 3.15)
The demand and supply function of a good are given as:
Demand function: P = 60 – 0.6Q
Supply function: P = 20 + 0.2Q
17
Answer (W.E. 3.15)
Pe = 50 units
Qe = $30
Total surplus = CS + PS
= 750 + 250
= 1000
18