W6-1
Producer Theory
Topic 2 (conclusion)
Econ20002 semester 1
Intermediate Microeconomics
Svetlana Danilkina
Lectures, week 6
Overview
2. Cost minimisation
d. LR and SR compared
 output expansion paths;
 total, average and marginal costs.
3. Profit maximisation by a competitive firm in SR
a. separation of technology and the market structure
b. optimal output to maximise profit
c. when profit is positive
d. when to produce / when to shut down
e. summary
f. short run and long run
g. short run supply curve
h. examples
W6-2
W6-3
2d. Short run output expansion path
K
q3
L
q2
q1
q
Cost
q1 q2 q3
K
Short run
expansion path
()
SR
3C
SR
1C
SR
2C
BD E
w/r
isocost line isocost lineisocost line
SR
1C
SR
2C
SR
3C
W6-4
Short run and long run
K
q3 Long run
expansion path
L
q2
q1
q
Cost
q1 q2 q3
K Short run expansion path
SR
3C
SR
1C
D E
B
A
C
w/r
C1
C2
C3
()
()
W6-5
Short run and long run costs
q
CLR
The short run cost curves are always above the long run cost
curve.
They touch when the short run amount of capital is equal to the
long run optimal amount of capital needed to produce required
output.
q1 q2 q3
The long run cost curve is the
envelope of the short run curves
SR
3CSR
2C
SR
1C
W6-6
q
The short run average cost curves are always above the long run cost
curve.
They touch at the level of output when the short run amount of capital
equal to the long run optimal amount of capital.
q1 q2 q3
The long run average cost
curve is the envelope of the
short run average curves
SR and LR costs: U-shaped ACLR
SR
3AC
SR
2ACSR
1AC
ACLR
W6-7
q
The long run marginal cost intersects the long run average cost at its
minimum from below.
The short run marginal cost intersects the short run average cost at its
minimum from below.
The minimum of short run AC does not lie on the LR average curve,
unless the minimum of SR AC coincides with the minimum of LR AS –
see black SR AC2 on the previous slide.
q3
SR and LR costs: U-shaped ACLR
3

3

ACLRMCLR
min of ACLR
min of ACSR
8 of 55Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.
The Relationship between Short-Run and Long-Run Costs
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W6-9
q
The short run average cost curves are always above the long run cost
curve.
q1 q2 q3
The long run average cost
curve is the envelope of the
short run average curves
SR and LR costs: constant ACLR
ACLR
SR
3AC
SR
2AC
SR
1AC
W6-10
3a. Separation of the production
technology and the market structure
production technology determines
how to produce – cost minimization
• optimal combination of inputs (with smallest cost) to produce a
given amount of output
market structure determines
how much to produce – profit maximization
• what is the optimal output to produce given the cost function? It
depends on the market structure – whether the firm is competitive, a
monopoly and so on.
3. profit maximization of a competitive
firm in SR
W6-11
3b. Short run profit maximization of a
competitive firm with increasing MC
Maxq π(q) = Revenue (q) – Cost (q)
Profit is maximised at the point where additional
increment to output leaves profit unchanged (FOC).
MR(q*) = MC(q*) for any firm; Rational agents think on the margin
for the competitive firm: p = MC(q*)
For the competitive firm (because it is a price-taker):
( ) ( ) ( ) ( ): ( ) ( ) 0d q d R C dR q dC qFOC MR q MC q
dq dq dq dq
π −
= = − = − =
( ) ( )( ) ; ( ) dR q d pq dqR q pq MR q p p
dq dq dq
= = = = =
W6-12
To maximize profit, the competitive firm should
produce output q* such that p = MC(q*)
(or produce nothing – see later)
p > AC(q*)
• Can we guarantee that this profit is positive? No!
• The profit is positive if
Revenue > Cost
pq > q AC(q)
• Will firm produce if profit is negative? Isn’t it better to
shut down (produce zero output)?
3c. when profit is positive
W6-13
• Will firm produce if profit is negative? Isn’t it better to shut
down (produce zero output)?
In the short run:
• If firm does not produce, the profit is still negative
= - fixed cost.
• If firm produces q* (remember – it is profit maximizing
output, you can’t do any better), then
the profit = pq* - cost =
= pq* - variable cost – fixed cost =
= pq* - AVC q* - fixed cost
• Therefore, in the SR the firm will produce (even if profit
is negative) if
pq* - AVC(q*)q* ≥ 0 →
Forget about money - just minimize losses
p ≥ AVC(q*)
3d.
Produce or not produce? –
this is the question (...and how much?)
The profit is negative = - fixed cost
p = MC(q*)If produce, then produce q* :
The profit is positive/zero/negative if p >=< AC(q*)
If not, then produce zero (shut down): :q = 0
The answer:
q*, if p ≥ AVCSR(q*)
0, if p < AVCSR(q*)
In SR produce
The profit
positive if p > ACSR(q*)
zero if p = ACSR(q*)
negative if p < ACSR(q*)
First, find q*: p = MC(q*)
3e.
W6-15
p = MC(q*)
The profit will be
positive, if p > ACSR(q*)
0, if p = ACSR(q*)
negative, if p < ACSR(q*)
In SR the firm will produce
q*, if p ≥ AVCSR(q*)
0, if p < AVCSR(q*)
Therefore, in the SR for some prices the firm will find it optimal to
produce output even though the profit is negative.
Would it be the same in the Long Run? No – in the long run the firm
can always quit the industry and achieve the zero profit.
For example,
 you don’t need to renew a lease on your shop if it looses money
 you don’t have to hire expensive experts again for your firm if it is not
profitable
In LR the firm will produce
q*, if p ≥ ACLR(q*)
0, if p < ACLR(q*)
The profit will be
positive, if p > ACLR(q*)
0, if p ≤ ACLR(q*)
3f. SR and LR
W6-16
In SR the firm will produce
q*, if p ≥ min AVCSR
0, if p < min AVCSR
MCSR
AVCSR
q
p
pmin
q*
3g. SR supply curve
The competitive firm’s SR supply curve is the SR
marginal cost curve above the SR average variable cost
pmin = min AVCSR
SR Supply curve p = MCSR(q*)
W6-17
firm produces q*: p = MC(q*)
profit is positive:
p > ACSR (q*)
profit = [p - AC(q*)] q*
MCSR
AVCSR
q
p
pmin
q*
SR Supply curve
3h. Firm produces and makes
positive profit in SR
The competitive firm’s SR supply curve is the SR
marginal cost curve above the SR average variable cost
pmin = min AVCSR
ACSRprofit
W6-18
p
MCSR
AVCSR
q
pmin
q*
SR Supply curve
The competitive firm’s SR supply curve is the SR
marginal cost curve above the SR average variable cost
pmin = min AVCSR
ACSR
Firm produces and makes
zero profit in SR
firm produces q*: p = MC(q*)
profit is zero:
p = ACSR (q*)
profit = [p - AC(q*)] q* = 0
W6-19
The competitive firm’s SR supply curve is the SR
marginal cost curve above the SR average variable cost
pmin = min AVCSR
Firm produces and makes
negative profit in SR
firm produces q*: p = MC(q*)
profit is negative:
p < ACSR (q*)
profit = [p - AC(q*)] q* p
MCSR
AVCSR
q
pmin
q*
SR Supply curve
ACSR
losses
W6-20
firm does not produce
profit is negative:
profit = - fixed cost
MCSR
AVCSR
q
p
pmin
SR Supply curve
The competitive firm’s SR supply curve is the SR
marginal cost curve above the SR average variable cost
pmin = min AVCSR
ACSR
Firm does not produce and
makes negative profit in SR
Lectures, week 6
Topic 3. Markets
(partial equilibrium)
Econ20002 semester 1
Intermediate Microeconomics
Svetlana Danilkina
W6-21
W6-22
Overview
1. Markets
1. equilibrium prices and equilibrium quantities
2. partial and general equilibrium
2. Perfect competition
1. SR equilibrium
2. LR equilibrium with U – shaped AC
3. per unit tax
4. Welfare analysis of perfectly competitive markets
– review from Intro Micro
W6-23
1.1 Markets: equilibrium
Interaction between consumers and producers
Consumers: demand function (Consumer Theory)
Producers: supply function (Producer Theory)
Market equilibrium (demand equals supply)
Actually, quantity demanded = quantity supplied:
equilibrium price and equilibrium quantity
Here is the picture of the invisible hand:
W6-24
1.2 Markets: partial equilibrium
 Partial Equilibrium
 Consider the market for one good
 Assume that prices of all other goods are fixed
 Determine equilibrium price for this good
 General equilibrium (next topic)
 Consider the markets for all goods
 Determine equilibrium prices for all goods
 Important when markets are interrelated
W6-25
2. Markets: Perfect competition
 Large number of firms
 Each firm is a price-taker (no strategic
interactions)
 Homogeneous product
 Perfect information
 Free entry to and exit from the market
Competitive forces are economists’ dreams and
business’ nightmares.
Michael Wetzstein.
add horizontally
+ =
2.1 Perfect competition:
SR market (industry) supply
 In the short run the number of firms is fixed
 Each firm can vary variable input but cannot vary fixed input, so
costs are SR costs
 Each firm produces the optimal SR output:
 p = MCSR (q) if price is above or equal to AVCSR (q);
 zero output otherwise
 The profit for each firm could be positive, zero, or negative
 The industry supply is equal to the sum of supply curves of all
firms
q1
p supply of
firm 1
p p
q2 q = q1 + q2
supply of
firm 2
market (industry)
supply
7
3020 10
W6-27
Perfect competition:
SR market equilibrium
q1
p SR industry
supply
pc
p
qfirmq
Consumer
demand
firm’s supply
MC curve
qc
ACSR
 Each firm produces the optimal SR output
(p = MCSR) if above AVCSR or not at all
 The profit for each firm could be positive, zero, or
negative. On the graph above the profit is positive
W6-28
Perfect competition:
SR market equilibrium
q1
p SR industry
supply
pc
p
qfirmq
Consumer
demand
firm’s supply
MC curve
qc
ACSR
 Each firm produces the optimal SR output
(p = MCSR) if above AVCSR or not at all
 The profit for each firm could be positive, zero, or
negative. On the graph above the profit is negative
W6-29
2.2 Perfect competition: LR
 In the long run the number of firms is not fixed
 Firms will enter if profits are positive
 Firms will exit if profits are negative
 Free entry and exit will lead to zero profits in
the industry
 Each firm produces the optimal LR output
(p = MCLR) if above or equal to ACLR or not at all
What do we know about perfect competition in LR ?
W6-30
 Long run equilibrium is determined by the intersection of
the long run industry supply and consumers’ demand
 Long run industry supply can be
 perfectly elastic (horizontal)
 upward sloping
 downward sloping
Perfect competition:
LR market equilibrium
p
LR industry supply
(perfectly elastic)
pc
q
Consumer
demand
qc
p
LR industry
supply
(upward
sloping)
pc
q
Consumer
demand
qc
How does LR
industry supply
look like ?
W6-31
 Long run supply of a competitive firm depends on the
production technology of the firm (returns to scale)
 Note that the LR supply of a competitive firm is not that
important for determining the LR industry supply:
Though the LR industry supply is the sum of LR supplies
of firms, the number of firms is not fixed – they can enter
or exit.
 Entry and exit are relatively difficult in many manufacturing and
mining industries and government-regulated industries as public
utilities and insurance.
 Firms can enter and exit easily in many agriculture, construction,
wholesale and retail trade, and service industries
Perfect competition:
LR supply
W6-32
 We are going to determine the LR market
equilibrium for the following case:
 firms have U-shaped LR average cost function
 We will assume constant–cost industry: no matter
how many firms enter or exit the industry, their cost
functions are exactly the same (i.e. factor prices do not
change and firms have access to exactly the same
technology).
 We want to answer the following questions:
 what are the equilibrium market price and output?
 how many firms are in the market?
 how much does each firm produce?
 what is the profit of each firm?
PC: LR market equilibrium in
constant-cost industry
W6-33
 How do I find LR equilibrium price? Do I know any
helpful information?
 I know that firms must make zero profits. So all quantities produced,
number of firms in the industry and price should be such that each
firm’s profit is zero.
 A firm produces at p = MCLR (if ≥ min ACLR) to maximize profit.
 If price is above min ACLR, then the profit of each firm will be positive;
infinite number of new firms will be willing to enter => quantity supplied
by industry is infinite. That can’t be an equilibrium because consumer
demand for this price is finite. So can’t have QS = QD.
 If price is below min ACLR, then the profit of each firm will be negative;
so firms will not produce in LR => quantity supplied by industry is zero.
That can’t be an equilibrium either because consumer demand for this
price is greater that zero. So can’t have QS = QD.
 If price is exactly equal to min ACLR, then industry will be willing to
produce any quantity required (each firm will produce q1 at zero profit)
Perfect competition:
LR equilibrium price = min(ACLR).
W6-34
 Equilibrium price is always equal to min of ACLR, no matter how
much output is supplied.
 The perfectly competitive industry is willing to produce any
quantity at this price.
 That means that LR industry supply is a horizontal line at price =
min(ACLR). It is perfectly elastic.
q1 = 3
p
pc
p
qfirmq
MCLR
ACLRLR industry supply
LR industry supply is perfectly elastic (horizontal) at minimum of ACLR.
Assume that min ACLR = $6 at q1 = 3
p = $6
$6
Formula for LR supply curve: p = $6
Perfect competition:
LR industry supply
W6-35
 At the equilibrium, supply = demand
 We already know the LR equilibrium price.
 The industry output = equilibrium market quantity qc is
determined by the demand at price pc
 So, whatever consumers are willing to buy at this price, is
the market output.
q1 = 3
p
pc = 6
p
qfirmq
Consumer
demand MCLR
qc
ACLR
LR industry supply
p = $6
6
Assume that min ACLR = $6 reached at q1 = 3
market (industry) equilibrium output
W6-36
 Each firm produces q1 (where ACLR achieves minimum).
The profit of each firm is zero.
 The number of firms in the industry is market output/
output of each firm: N = qc / q1
q1 = 3
p
pc = 6
p
qfirmq
Consumer
demand MCLR
qc
ACLR
LR industry supply
p = $6
6
What is the output of each firm? How
many firms are in the industry?
LR equilibrium is all done: equilibrium price, market
output, each firm’s output, number of firms, profit.
W6-37
Perfect competition: LR & SR market
equilibria with U-shaped ACLR
q1
p SR industry
supply
pc
p
qfirmq
Consumer
demand
MCSR MCLR
qc
ACLR
LR industry supply
ACSR
To see how introduction of tax, changes in consumer demand and
so on will affect price and quantity:
 In SR – determine where SR supply intersects Demand => find
new market price and quantity. Look at the diagram for a firm to
determine the quantity produced by each firm.
 In LR – determine where LR supply intersects Demand => find new
market price and quantity. Look at the diagram for a firm to
determine the quantity produced by each firm. Divide market
quantity by firm’s output to find number of firms.
W6-38
Example: what happens when
consumer demand increases?
q1
p SR industry
supply
pc
p
qfirmq
Consumer
demand
MCSR MCLR
qc
ACLR
LR industry supply
ACSR
 Initially, market is in the LR equilibrium.
W6-39
Example: what happens when
consumer demand increases?
q1
p
pc
p
qfirmq
Consumer
demand MCLR
qc
ACLR
LR industry supply
 Initially, market is in the LR equilibrium.
 Then demand increases.
W6-40
Short Run
q1
p
pc
p
qfirmq
Consumer
demand
qc
 We need to look at SR costs to determine SR response for each
firm and industry in general.
 Both equilibrium price and quantity will increase.
 As firm produces where p = MCSR, it will produce more now.
SR industry
supply
MCSR
ACSR
W6-41
Short Run
q1
p
pc
p
qfirmq
Consumer
demand
qc
 As firm produces where p = MCSR, it will produce more now.
 Firms will make positive profit = (p - ACSR)q, as p > ACSR
SR industry
supply
MCSR
ACSR
W6-42
Long Run
q1
p
pc
p
qfirmq
Consumer
demand
qc
 New firms will be happy to enter the industry to make the same
profits.
 Their cost structure is the same as for the firms already in the
industry (constant – cost industry assumption).
 As a result, the SR industry supply increases – starts shifting to the
right.
SR industry
supply MCSR
ACSR
W6-43
Long Run
q1
p
pc
p
qfirmq
Consumer
demand
qc
 SR industry supply shifts to the right as more and more firms enter.
As a result, price starts decreasing.
 The existing firms start decreasing production and their profits
decrease.
 The firms will keep entering until there is no more profits to be
made – when price is back to the initial level = min ACSR
SR industry
supply MCSR
ACSR
W6-44
Long Run
q1
p
SR industry
supply
pc
p
qfirmq
Consumer
demand MCSR MCLR
qc
ACLR
LR industry supply
ACSR
 New LR equilibrium: price is the same, market output increased;
 Each firm produces the same output as before and makes zero
profit;
 but number of firms increased.
W6-45
Long Run: skip SR
q1
p
pc
p
qfirmq
Consumer
demand MCLR
qc
ACLR
LR industry supply
 New LR equilibrium: price is the same, market output increased
 Each firm produces the same output as before and makes zero
profit
 but number of firms increased N = new market quantity / q1
W6-46
2.3 Constant, increasing and
decreasing cost industries
So far we got the horizontal (perfectly elastic) LR
market supply for the industry with U–shaped AC. The
reason is that we assumed that no matter how many firms
enter or exit the industry, their cost functions are exactly
the same, i.e. the input prices do not vary with output
(constant–cost industry).
p
LR industry supply
(perfectly elastic)
pc
q
Constant - cost industry
W6-47
 This is not generally the case. If a lot of new firms enter the
industry, all firms might have to pay more for inputs (due to
shortage). In that case the cost will increase. As a result, the LR
supply curve will be upward sloping (increasing–cost industry).
 The LR curve is upward sloping as well if:
 entry is limited
 firms are different – they have different cost functions, and the firms with
the lowest cost can produce only limited amount of output
 Note that it might be downward sloping as well (if increase in
output leads to decrease in input prices) - decreasing–cost
industry.
p
LR industry supply
(perfectly elastic)
pc
q
Constant-cost industry
p
LR industry
supply (upward
sloping)
q qc
Increasing-cost industry
W6-48
Example: increasing – cost industry,
demand increases
q1
p
SR industry
supply
pc
p
qfirmq
Consumer
demand
qc
ACLR
LR industry supply
 New LR equilibrium: price and market output increased;
 Each firm makes zero profit;
 number of firms increased.
MCLR
W6-49
2.3 Example: per unit tax t,
in constant-cost industry, in SR
q1
p
SR industry
supply
pc
p
qfirmq
Consumer
demand
MCSR
qc
ACSR
 MC and AC shifts up by t.
 SR: price increases, market output decreases
 Each firm produces less output and makes negative profit
t
losses
W6-50
q1
p
SR industry
supply
pc
p
qfirmq
Consumer
demand
MCSR
qc
 Each firm makes negative profit
 Firms start exiting the industry. As a result, SR industry supply
shifts even further to the left. As more firms exit, price keeps
increasing until it reaches the level where firms make zero profit –
i.e., new min ACSR = old one plus t.
t
Example: per unit tax t,
in constant-cost industry, in LR
ACSR
losses
W6-51
q1
p
SR industry
supply
pc
p
qfirmq
Consumer
demand
MCSR
qc
ACSR
 This is new LR equilibrium: price is up by the amount of tax:
consumers bear all the burden of taxation; total output decreased
 Each firm produces the same output as before, but number of
firms decreased.
 The new LR industry supply curve is horizontal at new min ACSR
t new LR industry supply
old LR industry supply
Example: per unit tax t,
in constant-cost industry, in LR
W6-52
2.4 Welfare analysis of
perfectly competitive markets
Review from Intro Micro
We use the demand curve to measure consumer
surplus
We use the supply curve to measure producer
surplus
53 of 50Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.
● consumer surplus Difference between what a consumer is
willing to pay for a good and the amount actually paid.
Consumer Surplus
Consumer surplus is the total
benefit from the consumption of a
product, less the total cost of
purchasing it.
Here, the consumer surplus
associated with six concert tickets
(purchased at $14 per ticket) is
given by the yellow-shaded area:
$6 + $5 + $4 + $3 + $2 + $1 = $21
CONSUMER SURPLUS
FIGURE 4.14 Consumer Demand = sum of
consumers’ demands
W6-53
consumer surplus
Copyright©2003 Southwestern/Thomson Learning
Consumer
surplus
Quantity
Price
0
Demand
P*
Q*
How to measure the consumer surplus:
= the area below the demand curve
and above the price, between 0 and
the quantity bought.
Consumer Surplus = difference
between what consumers are willing
to pay for a good and the amount
actually paid
the market demand curve depicts the various quantities that
buyers are willing and able to purchase at different prices
W6-54
55 of 35Copyright © 2013 Pearson Education, Inc. • Microeconomics • Pindyck/Rubinfeld, 8e.
Producer Surplus of a firm
● producer surplus Sum over all units produced by a firm of
differences between the market price of a good and the marginal cost of
production.
PRODUCER SURPLUS FOR
A FIRM
FIGURE 8.11
The producer surplus for a firm
is measured by the yellow area
below the market price and
above the marginal cost curve,
between outputs 0 and q*, the
profit-maximizing output.
Alternatively, it is equal to
rectangle ABCD because the
sum of all marginal costs up to
q* is equal to the variable costs
of producing q*.
Producer surplus = R − VC
W6-5
producer surplus
Copyright©2003 Southwestern/Thomson LearningQuantity
Price
0
Demand
P*
Q*
How to measure the producer surplus:
= the area below the market price and
above the market supply curve,
between 0 and output sold.
Producer Surplus = difference between
price and the marginal cost of
production, summed up for all units sold.
the market supply curve depicts the various quantities that
firms are willing to produce at different prices = sum of
individual supply curves by all firms in the industry
Producer
Surplus
Supply
W6-56
PC markets maximise total welfare
Producer
surplus
Consumer
surplus
Price
0 Quantity
P*
Q*
Supply = MC
Demand = WTP
W6-57
Which quantity is efficient?
Copyright©2003 Southwestern/Thomson Learning
Quantity
Price
0
Supply
Demand
Cost
to
sellers
Cost
to
sellers
Value
to
buyers
Value
to
buyers
Value to buyers is greater
than cost to sellers.
Value to buyers is less
than cost to sellers.
Equilibrium
quantity
W6-58
PC markets maximise total welfare:
underproduction (Q1Price
0 QuantityQ*
Supply = MC
Demand = WTP
Surplus lost
Q1 W6-59
PC markets maximise total welfare:
overproduction (Q2>Q*) is a bad idea
Price
0 QuantityQ*
Supply = MC
Demand = WTP
Surplus lost
Q2 W6-60
PC markets maximise total welfare
 messing with Perfectly Competitive markets is a
bad idea
 it leads to welfare losses (dead weight loss DWL):
 price floor (minimum price)
 price ceiling (maximum price)
 price supports
 quotas
 tax/subsidy
 others
W6-61
Producer
surplus
Consumer
surplus
Price ceiling in a market –
maximum price
P
0 QQ*
S
D
DWL
Pmax
Q1 Q2
Maximum price is below
equilibrium price, so firms are
willing to produce only Q1, but
consumers are willing to buy Q2
=> shortage
CS: ambigious (increases by
yellow rectangle and decreases
by upper red triangle).
Consumers who get goods are
paying much less; a lot of
consumers can’t get the good
due to shortage.
PS: decreases (by yellow
rectangle and lower red triangle)
DWL: appears => total welfare
decreases
P*
shortage
W6-62
Producer
surplus
Consumer
surplus
Price floor in labour market –
minimum wage
w
0 LL*
Supply of
labourDWL
wmin
L1 L2
Minimum wage is above
equilibrium price, so firms are
willing to hire only L1 labour, but
people are willing to supply L2 =>
unemployment
CS: who consumes labour?
Firms. CS decreases by green
rectangle and upper red triangle)
PS: who supplies labour?
people. PS ambiguous (gain
rectangle, lose lower red
triangle). People who get jobs,
are paid higher wage.
DWL: appears
w*
unemployment
Demand for labour
W6-63
Producer
surplus
Consumer
surplus
per unit tax (specific tax)
P
0 QQ*
S
D
DWL
Qtax
Firms are willing to produce
only Qtax. Consumers pay PB,
but producers receive only
PS = PB – tax.
CS: decreases (by upper grey
rectangle and upper red
triangle)
PS: decreases (by lower grey
rectangle and lower red
triangle)
DWL: exists
P*tax
W6-64
PS
PB
Producer
surplus
Consumer
surplus
per unit tax: burden of taxation
P
0 QQ*
S
D
Qtax
Suppose tax = $5.
Consumers price increased
by $3 and producers price
decreased by $2.
Then consumers pay 60%
of the tax and producers
pay 40% of the tax.ta
x
W6-65
PS
P*
PB
paid by
consumers
paid by
producers
Who really ends up paying tax?
Welcome to the world of
perfect competition,
where you work very very
hard to achieve zero profit!
Enjoy!
W6-66