Dear Students

I hope you are well. As part of the revision for Learning unit 9 please see below quiz 1 to help you
practice and read relevant information in the learning unit. Please feel free to ask or make
comments regarding any topic in learning unit 9. Suggested answers to the following quiz will be
shared during the course of the week.

Learning Unit 9, Quiz 1

The Analysis of Competitive Markets

Use consumer and producer surplus to evaluate government policies.

Determine the efficiency of a competitive market.

Describe the effects of the implementation of minimum prices.

Describe the effects of price support and production quotas

Have a blessed and productive week ahead. Keep safe.

Warm regards

Mr Hobongwana

(2021-06-28 18:12:38)

K HOBONGWANA

Answers to Learning Unit 9, Quiz 1

The Analysis of Competitive Markets

Use consumer and producer surplus to evaluate government policies.

But remember, for some consumers the value of the good exceeds this market price; they would pay
more for the good if they had to.

Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the
good.

Refer to Figure 9.1. For example, suppose the market price is $5 per unit, Some consumers probably
value this good very highly and would pay much more than $5 for it.

Consumer A, for example, would pay up to $10 for the good. However, because the market price is
only $5, he enjoys a net benefit of $5—the $10 value he places on the good, less the $5 he must pay
to obtain it. Consumer B values the good somewhat less highly. She would be willing to pay$7, and
thus enjoys a $2 net benefit.

Finally, Consumer C values the good at exactly the market price, $5. He is indifferent between buying
or not buying the good, and if the market price were one cent higher, he would forgo the purchase.
Consumer C, therefore, obtains no net benefit.1 For consumers in the aggregate, consumer surplus
is the area between the demand curve and the market price.

Because consumer surplus measures the total net benefit to consumers, we can measure the gain or
loss to consumers from a government intervention by measuring the resulting change in consumer
surplus.

Producer surplus is the analogous measure for producers. Some producers are producing units at a
cost just equal to the market price. Other units, however, could be produced for less than the
market price and would still be produced and sold even if the market price were lower.

Producers, therefore, enjoy a benefit a surplus from selling those units. For each unit, this surplus is
the difference between the market price the producer receives and the marginal cost of producing
this unit.

For the market as a whole, producer surplus is the area above the supply curve up to the market
price; this is the benefit that lower-cost producers enjoy by selling at the market price.

In Figure 9.1, it is the green triangle. And because producer surplus measures the total net benefit to
producers, we can measure the gain or loss to producers from a government intervention by
measuring the resulting change in producer surplus.

Determine the efficiency of a competitive market.

Maximization of aggregate consumer and producer surplus.

The policy therefore imposes an efficiency cost on the economy.

producer and consumer surplus are reduced by the amount of the deadweight loss.

MARKET FAILURE:
One might think that if the only objective is to achieve economic efficiency, a competitive market is
better left alone.

This is sometimes, but not always, the case. In some situations, a market failure occurs: Because
prices fail to provide the proper signals to consumers and producers,

the unregulated competitive market is inefficient—i.e., does not maximize aggregate consumer and
producer surplus.

There are two important instances in which market failure can occur:

Externalities: Sometimes the actions of either consumers or producers result in costs or benefits that
do not show up as part of the market price.

Lack of Information: Market failure can also occur when consumers lack information about the
quality or nature of a product and so cannot make utility-maximizing purchasing decisions.

. Refer to figure 9.5 of prescribe textbook.

Describe the effects of the implementation of minimum prices.

government policy sometimes seeks to raise prices above market-clearing levels, rather than lower
them.

Examples include the former regulation of the airlines by the Civil Aeronautics Board, the minimum
wage law, and a variety of agricultural policies.

One way to raise prices above market-clearing levels is by direct regulation—simply make it illegal to
charge a price lower than a specific minimum level.

Refer Figure 9.7. from textbook If producers correctly anticipate that they can sell only the lower
quantity Q3, the net welfare loss will be given by triangles B and C. But as we explained, producers
might not limit their output to Q3. What happens if producers think they can sell all they want at the
higher price and produce accordingly? That situation is illustrated in Figure 9.7, where Pmin denotes
a minimum price set by the government. The quantity supplied is now Q2 and the quantity
demanded is Q3, the difference representing excess, unsold supply. Now let’s determine the
resulting changes in consumer and producer surplus. Those consumers who still purchase the good
must now pay a higher price and so suffer a loss of surplus.

Describe the effects of price support and production quotas.

Price Supports- In the United States, price supports aim to increase the prices of dairy products,
tobacco, corn, peanuts, and so on, so that the producers of those goods can receive higher incomes.
Under a price support program, the government sets a support price Ps and then buys up whatever
output is needed to keep the market price at this level. Refer to Figure 9.10 from textbook.

Production Quotas- Besides entering the market and buying up output—thereby increasing total
demand—the government can also cause the price of a good to rise by reducing supply.

It can do this by decree—that is, by simply setting quotas on how much each firm can produce. With
appropriate quotas, the price can then be forced up to any arbitrary level.

Refer to Figure 9.11. on textbook