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UNIVERSITY OF DHAKA

BBA 17 T H

B ATC H

T E R M PA P E R O N M I C RO E CO N O M I C S

Term Paper on MICROECONOMICS


Prepared for M. Nasiruddin Prefessor Honorary Department of Finance University of Dhaka

Prepared by Niaz Mohammad Solaiman Roll: 17-018 Department of Finance University of Dhaka

Course Title: Microeconomics Course Code: F-106 Date of Submission: 17th December 2011

Letter of Transmittal

December 17, 2011 M. Nasiruddin Professor Honorary Department of Finance University of Dhaka Sir: Here is the Term Paper on the study of Microeconomics that you assigned as on November 15. The study tells about economic efficiency, government price setting and taxes. From this study we will come to know about the consequences of interventions such as consumers surplus, producers surplus, efficiency of the competitive markets, government intervention on the market, price floors, price ceilings and the effect of taxes. The study tells us much about the importance as well as the effects of microeconomics. I am grateful for assigning me the mentioned topic and to study about what I am assigned. If you need any additional data or assistance regarding the topic, please contact with me. Sincerely yours, Niaz Mohammad Solaiman Roll: 17-018

Table of Content
Topic
Letter of transmittal Executive Summary Introduction Efficiency of Competitive Markets Government Intervention Economic impact of Taxes

Page
3 6 8 14 16 19 22

Quantities Analysis

Executive Summary

This term paper is done for several objectives regarding microeconomics. As Microeconomics is read widely throughout the whole world it has a great importance and impact on the social and economic life of the human. In this report, economic efficiency, consequences of the government intervention, producers surplus, consumers surplus and other effects are briefly discussed. So the report not only gives us the basic idea about the microeconomic efficiency but also represents and helps us to find the ways of calculating different surpluses and taxes for social use. Some mathematical calculations are also shown on the report and that are of great importance.

Economic Efficiency, Government Price Setting and Taxes

Introduction

Incidentals of Authorization and Submittal


This study on the economic efficiency, government pricing and taxes is submitted to M. Nasiruddin, Professor Honorary, Department of Finance, University of Dhaka, on December 17, 2011. As authorized on November 15.

Objectives of the Study


This is the study where the importance is given on the economic consequences on government pricing, taxes and the economic efficiency. The main objective of this paper is to know about the calculations for finding out surpluses, taxes and other economic effects that will help us on increasing our knowledge and to fulfill our course.

Analysis of the Work


During this study activities were grouped together into six parts: Introduction Consumer surplus Producer surplus. Efficiency of competitive markets. Price floors and price ceilings. Economic impact of taxes.

Introduction
Under perfect competition a market without intervention reaches equilibrium: The quantity of goods consumers are willing to buy equals the quantity of goods firms are willing to sell. In real world, government intervenes markets: Price ceilings Price Floors Taxes What are the consequences of interventions? Consumer, producer and economic surpluses

Consumer Surplus
Demand curves show willingness of consumers to purchase a product at different prices. Another way to see the demand curve: Demand curve shows at each point what is the additional benefit to a consumer in the market from consuming one more unit. Demand curve depicts the marginal benefit at different prices. Example 4 consumers in the tea market.

Difference between highest price a consumer is willing to pay (benefit received from consumption) and price that actually pays. How much would you pay for a piece of handicraft? How to estimate Consumer Surplus in a market? Demand curves.

Usually there are many consumers in markets, and demand curves are smooth lines. CS is area below curve and above price.

Producers Surplus

What are the supply curves showing to us? The willingness of firms to supply a product at different prices.

What this willingness depends on? Firms observe price in the market, compare it with production costs and decide to produce or not. Then, willingness to supply depends on cost of production. When are firms willing to supply an extra unit? Only when they recover the additional cost of producing that last unit. When price is higher or equal to marginal cost

Supply curve is also the marginal cost curve. Marginal cost increases as more resources are used. Supply curves are usually upward sloping.

Difference between the lowest prices a firm would be willing to accept (marginal cost) and the price it actually receives.

What Consumer Surplus and Producer Surplus Measure


Consumer surplus measures the net benefit to consumers from participating in a market rather than the total benefit. The net benefit equals the total benefit received by consumers minus the total amount they must pay to buy the good. Producer surplus measures the net benefit received by producers from participating in a market Total amount firms receive from consumers minus the cost of producing the good.

Efficiency of Competitive Markets


Marginal benefit equals marginal cost only at competitive equilibrium.

Economic Surplus is the sum of consumer surplus and producer surplus. In a competitive market, economic surplus is at maximum when the market is in equilibrium.

Deadweight loss: The reduction in economic surplus resulting from a market not being in competitive equilibrium.

Consumer Surplus measures the benefit to consumers from buying a particular good. Producer Surplus measures the benefit to firms from selling a particular good. Then, Economic Surplus is the best measure we have of the benefit to society from the production of a good. Equilibrium in a competitive market results in the greatest amount of total net benefit to society, from the production of a good or service.

Economic efficiency
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum.

Government Intervention in the Market


Consumers and firms can ask the government to legally change the prices set in the competitive markets. Rent control apartments Price floor in agricultural markets Minimum wage What is the effect of these interventions in the markets? Price Floors Price Ceilings

Price Floors
Government policy in agricultural markets

Price Ceilings
Government rent control policy in housing markets

When the government imposes price floors or price ceilings: Some people win. Some people lose. There is a loss of economic efficiency

Economic Impact of Taxes


Government uses taxes to collect money or to discourage the consumption of some goods. Impact of taxes on economic efficiency. Federal tax of $1-per-pack on cigarettes, paid by sellers

Imposition of taxes reduces Consumer Surplus and Producer Surplus. Part of this reduction goes to government as tax revenue. The rest is lost: deadweight loss. True burden of a tax is not only tax paid, but also the deadweight loss. Excess burden of the tax A tax is efficient if it imposes a small excess burden relative to the tax revenue it raises.

Who Actually Pays Tax


Whoever is legally required to pay the tax is not necessarily who actually bears the burden of the tax. Actual division of the burden of the tax: tax incidence

Consumers pay 8 cents, producers 2 cents.

What happens if the consumers are legally required to pay the tax instead of producers?

Quantitative Analysis
Demand and Supply Equations QD = 3,000,000 -1,000P QS = 450,000 +1,300P Equilibrium condition: QD= QS Solving: 3,000,000 1,000 P = 450,000 + 1,300 P 3,450,000 = 2,300 P P = 3,450,000 2,300 P = $1,500 To find quantity of equilibrium, we replace P in any equation QD = 3,000,000 1,000*(1,500) QD = 1,500,000 QS = 450,000 + 1,300*(1,500) QS = 450,000 + 1,950,000 QS = 1,500,000 With the demand and supply equation we can find the intercepts in the vertical axis by replacing Q by zero Demand: (0) = 3,000,000 1,000P 1,000P = 3,000,000 P = 3,000,000 1,000 P = 3,000 Supply: (0) = 450,000 + 1,300P 1,300P = 450,000 P = 450,000 1,300 P = 346.15

In the same way, for every price or quantity given, we can find the corresponding quantity or price along the curve, just by plugging the known value in the equation QD = 3,000,000 1,000P (10,000) = 3,000,000 1,000P 1,000P = 3,000,000 10,000 = 2,990,000 P= 2,990,000 1,000 P= 2,990 QS = 450,000 + 1,300P QS = 450,000 + 1,300(1,000) QS = 1,300,000 450,000 QS = 850,000

Consumer Surplus = (1,500 x 1,500,000) 2 = $1,125,000,000 Producer Surplus = (1,154 x 1,500,000) 2 = $ 865,500,000

Consumer Surplus = $1,125,000,000 + A B = $1,125,000,000 + ($425,000,000) ($211,250,000) = $1,338,750,000 Producer Surplus = $865,500,000 C A = $865,500,000 ($162,500,000) ($425,000,000) = $278,000,000 Deadweight Loss = B + C = $211,250,000 + $162,500,000 = $373,750,000

Conclusion
In the field of economics, microeconomics has a great impact. From the above study we can easily evaluate the importance of economic efficiency, tax, different surpluses etc. These are very essential part of our daily as well as social life. This term paper will be also be helpful for calculating tax, surpluses and dead weight loss to the society.

Bibliography
1. 2. 3. 4. Microeconomics Robert S. Pyndyck Daniel L. Rubinfield Prem L. Mehta Economics Paul A. Samuelson William D. Nordhus www.microeconomics.com www.bakerinstitute.org