Welfare and Applications of the Competitive Model Flashcards
What is the preferred method to measure Welfare?
Standard to Consumer Welfare(CS) over EV or CV.
CS is just the monetary difference between what the consumer is willing to pay
for the quantity purchased and the actual price paid. In a market scenario, we
just add CS up across consumers.
What is an appropriate measure of a firm’s welfare?
Profits (π)
How do we normally define Profits?
π(q) = p(q)q - VC(q) - F
But under the assumption of Perfect Competition, we assume price taking so p(q) = p
What are the two ways we represent and find a firms welfare?
Generally graphically.
i) Profits are equivalent to the grey area minus fixed costs, F.
ii) Profits are equivalent to the grey area: [p – AC(q)]q
More detail on (Profits are equivalent to the grey area minus fixed costs, F)
The difference between price and marginal cost, summed across each unit. (the supply curve equals the marginal cost curve).
But marginal costs do not include fixed costs, so these have to be subtracted.
SEE GRAPH IN NOTES
More detail on (Profits are equivalent to the grey area: [p – AC(q)]q)
For each unit sold, the firm collects the price in revenue, and incurs a cost
equal to the average cost at the final output, AC(q). Hence, by multiplying
across all units, this gives a measure of profits, [p – AC(q)]q*.
This incorporates fixed costs
SEE GRAPH IN NOTES
How do you calculate Producer Surplus?
PS = pq - VC(q)
Omits fixed cost
Why is the Producer Surplus the same as evaluating welfare via Profits?
Since, PS omits fixed cost
Using profits is the same if we consider fixed costs to be 0
How do you calculate Total Welfare in a market with no Government Activity?
W = CS + π
How do you calculate Total Welfare in a market with Government Activity?
W = CS + π + T
Can think of tax revenues as creating welfare through the social value that they can create when spent within the economy.
What can we assume in total welfare calculations?
There is no wastage or inefficiencies in government
expenditure, such that all tax revenue goes to welfare.
Why is the competitive Equilibrium maximise Total Welfare?
Read see Perlof 9.3
What is a Price Ceiling?
Govts sometimes regulate firms by enforcing laws that prevent firms from pricing above a certain level (Pbar)
e. g.
- Energy Markets
- Rented Properties
What happens to welfare when a Price Ceiling is implemented?
SEE GRAPH IN NOTES
SEE TABLE FOR WELFARE IN NOTES
EXAMPLE ON PRICE CEILINGS WELFARE CALCULATIONS
SEE IN NOTES
