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Comparative statics

We can also use this simple model to analyse the effects of shocks to each side of the market. Suppose that the demand for legal services shifted out (say, because of a rise in S, the degree of 'Englishness' of the cost allocation rule). Then more legal services will be consumed and produced in equilibrium, the market price for lawyers will rise, and aggregate welfare is lower by the change in the area underneath the supply curve, which is the area E + F in Figure 11.6.2.

Suppose instead that lawyers become more efficient (so that each unit of legal services can now be produced at a lower opportunity cost than before). The long-run supply curve shifts to the right. Then in equilibrium more legal services are consumed (which all else being equal would be a welfare loss) but each has a lower opportunity cost to produce (which all else being equal would be a welfare gain). With the demand curve in (11.24), and the supply curve in (11.25), these two effects exactly offset each other. To see why, consider Figure 11.6.3. Note that the demand curve in (11.24) as unit elasticity, so revenue accruing to producers does not change as we move up or down along a given demand curve. With

An increase in demand for legal services

Figure 11.6.2 An increase in demand for legal services

A reduction in the marginal cost of producing legal services

Figure 11.6.3 A reduction in the marginal cost of producing legal services

the supply curve in (11.25), total costs are always equal to the triangle below the supply curve, which is always exactly one half of total revenue. Hence, if total revenue does not change as we move along a demand curve, total cost does not either. This means that welfare must be constant along a given demand curve, and so the positive welfare effects of an efficiency improvement in the delivery of litigation services are exactly matched by negative welfare effects of greater demand for those services.

 
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