1、Chapter SixteenEquilibriumMarket EquilibriumuA market is in equilibrium when total quantity demanded by buyers equals total quantity supplied by sellers.Market EquilibriumpD(p)q=D(p)MarketdemandMarket EquilibriumpS(p)Marketsupplyq=S(p)Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)

2、Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*q*Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*q*D(p*) = S(p*); the marketis in equilibrium.Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*S(p)D(p) S(p); an excessof quantity supplied overqua

3、ntity demanded.pD(p)Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*S(p)D(p) S(p”); an excessof quantity demandedover quantity supplied.p”S(p”)Market EquilibriumpD(p), S(p)q=D(p)MarketdemandMarketsupplyq=S(p)p*D(p”)D(p”) S(p”); an excessof quantity demandedover quantity supplied.p

4、”S(p”)Market price must rise towards p*.Market EquilibriumuCan we calculate the market equilibrium using the inverse market demand and supply curves?Market EquilibriumuCan we calculate the market equilibrium using the inverse market demand and supply curves?uYes, it is the same calculation.Market Eq

5、uilibriumuTwo special cases:lquantity supplied is fixed, independent of the market price, andlquantity supplied is extremely sensitive to the market price.Market EquilibriumMarket quantity supplied isfixed, independent of price.pqq*Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqq* = cMarket quant

6、ity supplied isfixed, independent of price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqq* = cD-1(q) = (a-q)/bMarketdemandMarket quantity supplied isfixed, independent of price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqp*D-1(q) = (a-q)/bMarketdemandq* = cMarket quantity supplied isfixed

7、, independent of price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pq p* =(a-c)/bD-1(q) = (a-q)/bMarketdemandq* = cp* = D-1(q*); that is,p* = (a-c)/b.Market quantity supplied isfixed, independent of price.Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqD-1(q) = (a-q)/bMarketdemandq* = cp* = D-

8、1(q*); that is,p* = (a-c)/b. p* =(a-c)/bMarket quantity supplied isfixed, independent of price.pacbd* qadbcbd* Market EquilibriumS(p) = c+dp, so d=0and S(p) c.pqD-1(q) = (a-q)/bMarketdemandq* = cp* = D-1(q*); that is,p* = (a-c)/b.pacbd* qadbcbd* with d = 0 givepacb* qc*. p* =(a-c)/bMarket quantity s

9、upplied isfixed, independent of price.Market EquilibriumuTwo special cases arelwhen quantity supplied is fixed, independent of the market price, andlwhen quantity supplied is extremely sensitive to the market price. Market EquilibriumMarket quantity supplied isextremely sensitive to price.pqMarket E

10、quilibriumMarket quantity supplied isextremely sensitive to price.S-1(q) = p*.pqp*Market EquilibriumMarket quantity supplied isextremely sensitive to price.S-1(q) = p*.pqp*D-1(q) = (a-q)/bMarketdemandMarket EquilibriumMarket quantity supplied isextremely sensitive to price.S-1(q) = p*.pqp*D-1(q) = (

11、a-q)/bMarketdemandq*Market EquilibriumMarket quantity supplied isextremely sensitive to price.S-1(q) = p*.pqp*D-1(q) = (a-q)/bMarketdemandq* =a-bp*p* = D-1(q*) = (a-q*)/b soq* = a-bp*Quantity TaxesuA quantity tax levied at a rate of $t is a tax of $t paid on each unit traded.uIf the tax is levied on

12、 sellers then it is an excise tax.（消費稅，貨物稅，執照（消費稅，貨物稅，執照稅）稅）uIf the tax is levied on buyers then it is a sales tax.(營業稅營業稅)Quantity TaxesuWhat is the effect of a quantity tax on a markets equilibrium?uHow are prices affected?uHow is the quantity traded affected?uWho pays the tax?uHow are gains-to-tr

13、ade altered?Quantity TaxesuA tax rate t makes the price paid by buyers, pb, higher by t from the price received by sellers, ps.pptbs Quantity TaxesuEven with a tax the market must clear.uI.e. quantity demanded by buyers at price pb must equal quantity supplied by sellers at price ps.D pS pbs()() Qua

14、ntity Taxespptbs D pS pbs()() anddescribe the markets equilibrium.Notice that these two conditions apply nomatter if the tax is levied on sellers or onbuyers.Hence, a sales tax rate $t has thesame effect as an excise tax rate $t.Quantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp

15、*q*No taxQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*$tAn excise taxraises the marketsupply curve by $tQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An excise taxraises the marketsupply curve by $t,raises the buyersprice and lowers thequantit

16、y traded.$tpbqtQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An excise taxraises the marketsupply curve by $t,raises the buyersprice and lowers thequantity traded.$tpbqtAnd sellers receive only ps = pb - t.psQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarket

17、supplyp*q*No taxQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An sales tax lowersthe market demandcurve by $t$tQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An sales tax lowersthe market demandcurve by $t, lowersthe sellers price andreduces the

18、 quantitytraded.$tqtpsQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*An sales tax lowersthe market demandcurve by $t, lowersthe sellers price andreduces the quantitytraded.$tpbpbqtpbAnd buyers pay pb = ps + t.psQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMark

19、etsupplyp*q*A sales tax levied atrate $t has the sameeffects on themarkets equilibriumas does an excise taxlevied at rate $t.$tpbpbqtpbps$tQuantity Taxes & Market EquilibriumuWho pays the tax of $t per unit traded?uThe division of the $t between buyers and sellers is the incidence of the tax.Quantit

20、y Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by buyersQuantity Taxes & Market EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by sellersQuantity Taxes & M

21、arket EquilibriumpD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by buyersTax paid by sellersQuantity Taxes & Market EquilibriumuE.g. suppose the market demand and supply curves are linear.D pabpbb() S pcdpss() Quantity Taxes & Market EquilibriumandD pabpbb() S pcdpss(). Quantity Taxes & M

22、arket EquilibriumandWith the tax, the market equilibrium satisfiesandsoandD pabpbb() S pcdpss(). pptbs D pS pbs()() pptbs abpcdpbs .Quantity Taxes & Market EquilibriumD pabpbb() S pcdpss(). andWith the tax, the market equilibrium satisfiespptbs D pS pbs()() andsopptbs abpcdpbs .andSubstituting for p

23、b givesab ptcdppacbtbdsss ().Quantity Taxes & Market Equilibriumpacbtbds andpptbs giveThe quantity traded at equilibrium isqD pS pabpadbcbdtbdtbsb ()().pacdtbdb Quantity Taxes & Market Equilibriumpacbtbds pacdtbdb qadbcbdtbdt As t 0, ps and pb theequilibrium price whenthere is no tax (t = 0) and qt

24、the quantity traded at equilibriumwhen there is no tax.adbcbd ,*,pdbca Quantity Taxes & Market Equilibriumpacbtbds pacdtbdb qadbcbdtbdt As t increases, ps falls,pb rises, andqt falls.Quantity Taxes & Market Equilibriumpacbtbds pacdtbdb qadbcbdtbdt The tax paid per unit by the buyer isppacdtbdacbddtb

25、db *.Quantity Taxes & Market Equilibriumpacbtbds pacdtbdb qadbcbdtbdt The tax paid per unit by the buyer isppacdtbdacbddtbdb *.The tax paid per unit by the seller isppacbdacbtbdbtbds*. Quantity Taxes & Market Equilibriumpacbtbds pacdtbdb qadbcbdtbdt The total tax paid (by buyers and sellerscombined)

26、 isTtqtadbcbdtbdt .Tax Incidence and Own-Price ElasticitiesuThe incidence of a quantity tax depends upon the own-price elasticities of demand and supply.Tax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsTax Incidence and Own-Price ElasticitiespD(p), S(p)Marketdem

27、andMarketsupplyp*q*$tpbqtpsChange to buyersprice is pb - p*.Change to quantitydemanded is D Dq.D DqTax Incidence and Own-Price ElasticitiesAround p = p* the own-price elasticityof demand is approximately Dbqqppp D D*Tax Incidence and Own-Price ElasticitiesAround p = p* the own-price elasticityof dem

28、and is approximately DbbDqqpppppqpq D DD D*.Tax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsTax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsChange to sellersprice is ps - p*.Change to quantitydemanded is D Dq.D DqTax Incid

29、ence and Own-Price ElasticitiesAround p = p* the own-price elasticityof supply is approximately Ssqqppp D D*Tax Incidence and Own-Price ElasticitiesAround p = p* the own-price elasticityof supply is approximately SssSqqpppppqpq D DD D*.Tax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandM

30、arketsupplyp*q*pbpbqtpbpsTax paid by buyersTax paid by sellersTax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*pbpbqtpbpsTax paid by buyersTax paid by sellersTax incidence = ppppbs *.Tax Incidence and Own-Price ElasticitiesTax incidence = ppppbs *.ppqpqbD *.D D ppqpqsS

31、*.D D Tax Incidence and Own-Price ElasticitiesTax incidence = ppppbs *.ppqpqbD *.D D ppqpqsS *.D D SoppppbsSD *. Tax Incidence and Own-Price ElasticitiesppppbsSD *. Tax incidence isThe fraction of a $t quantity tax paidby buyers rises as supply becomes moreown-price elastic or as demand becomesless

32、own-price elastic.Tax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsAs market demandbecomes less own-price elastic, taxincidence shifts moreto the buyers. Tax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsAs market demandbecom

33、es less own-price elastic, taxincidence shifts moreto the buyers. Tax Incidence and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyps= p*$tpbqt = q*As market demandbecomes less own-price elastic, taxincidence shifts moreto the buyers. Tax Incidence and Own-Price ElasticitiespD(p), S(p)Mark

34、etdemandMarketsupplyps= p*$tpbqt = q*As market demandbecomes less own-price elastic, taxincidence shifts moreto the buyers. When D = 0, buyers pay the entire tax, even though it is levied on the sellers.Tax Incidence and Own-Price ElasticitiesppppbsSD *. Tax incidence isSimilarly, the fraction of a

35、$t quantitytax paid by sellers rises as supplybecomes less own-price elastic or asdemand becomes more own-price elastic.Deadweight Loss and Own-Price ElasticitiesuA quantity tax imposed on a competitive market reduces the quantity traded and so reduces gains-to-trade (i.e. the sum of Consumers and P

36、roducers Surpluses).uThe lost total surplus is the taxs deadweight loss, or excess burden.Deadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxCSDeadweight Loss and Own-Price Elas

37、ticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxPSDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxCSPSDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*No taxCSPSDeadweight Loss and Own-Price ElasticitiespD(p), S(p)Marketdema

38、ndMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PSDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto governmentTaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpb

39、qtpsCSPSThe tax reducesboth CS and PS,transfers surplusto governmentTaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto governmentTaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsu

40、pplyp*q*$tpbqtpsCSPSThe tax reducesboth CS and PS,transfers surplusto government,and lowers total surplus.TaxDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsCSPSTaxDeadweight lossDeadweight Loss and Own-Price ElasticitiespD(p), S(p)MarketdemandMarketsupplyp*q*$tpbqtpsDe