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Week 5 and 6 Notes

by: Alexa Johnson

Week 5 and 6 Notes AREC 202-001

Alexa Johnson
GPA 4.0
Agriculturl/ Resource Economics
Rebecca Lynn Hill

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About this Document

These notes cover the materials on Chapters 5 and 6 regarding price controls and elasticity. Elasticity is a very important topic for this course, so make sure to check out these comprehensive notes!
Agriculturl/ Resource Economics
Rebecca Lynn Hill
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This 4 page Bundle was uploaded by Alexa Johnson on Friday October 2, 2015. The Bundle belongs to AREC 202-001 at Colorado State University taught by Rebecca Lynn Hill in Spring 2015. Since its upload, it has received 36 views. For similar materials see Agriculturl/ Resource Economics in Business at Colorado State University.

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Date Created: 10/02/15
AREC 202 Agriculture and Natural Resource Economics week 56 Review gtMarket equilibrium maximizes the total surplus in a market 1 Efficiency dictates that there is no way to make some people better off without making others worse off 2 Inefficiency is when there are missed opportunities and under certain circumstances we call this market failure Chapter 5 Price Controls and Quotas Meddling with Markets gt Price controls are legal restrictions made by the government on how high or low a market price may go price controls come in two forms 1 A price ceiling is the maximum amount sellers can charge for a good or service 2 A price floor is the minimum price that buyers are required to pay for a good or service a Deadweight results from price controls and is the reduction of total economic surplus due to the adoption of39a policy such as these price controls This is when the quantity transacted is below efficiency and market equilibrium quantity 3 When policies are made it often becomes evident factually that government officials do not understand supply and demand analysis Igt A price ceiling is not common but has been imposed in times of crises such as ware disasters harvest failures etc 1 Price ceilings control the price so that the wealthy are not the only ones to benefit under said circumstances a However those that benefit from price ceilings are often better organized and more influential or those who don t need the price restrictions 2 Price ceilings cause inefficiency by lowering the quantity below equilibrium a Graphically the price ceiling is seen below the equilibrium think counter intuitively b Creates inefficiency in four key ways Reduces quantity of good or service Inefficient allocation of good or service to buyers Wasted resources Causes low quality or condition c Price ceilings also encourage black market activity markets in which goods or services are bought and sold illegally due to the legality of the good itself or the price at which it is sold 3 There are three key issues with price ceilings a A persistent shortage of good or service b Inefficiency c Emergence of illegal black markets Igt Aprice floor is when governments try to push the market prices up instead of down 1 Minimum wage is an example of a legal price floor on the wage rate or the market price of labor 2 A price floor is intended to be helpful to some people but it often causes undesirable yet predictable outcomes or side effects 3 The price floor is binding above equilibrium price a Graphically represented above equilibrium pt 4 Price floors cause inefficiency in four key ways opposite to that of the price ceiling a Creates deadweight loss by reducing quantity transacted below efficiency b Inefficient allocation of sales among sellers c wasted resources d Inefficiently high quality Can also encourage illegal activity such as paying someone under the table for less than the price floor 5 There are three key issues with price floors a A continuous surplus of the good b Inefficiency c The temptation of illegal activity gtgt Sometimes government impose quantity controls or quotas l A quantity control is an upper limit on the quantity of a good that can be bought or sold the total amount being the quota limit a A license gives the seller the right to supply the good 2 The demand price of a given quantity is the price at which consumers will demand that quantity while the supply price is the price at which producers will supply that quantity a The difference between the supply price and demand price in a market caused by quantity controls is a wedge The price paid by buyers ends up being higher than that received by sellers b The difference between these two prices is called the quota rent the earnings accrued to the license holder from ownership of the right to sell the good Equal to the market price of the license when licenses are traded c Overall like price controls quantity controls create deadweight loss and encourage illegal activity Chapter 6 Elasticity Recall that in a competitive market there are many buyers and sellers so everyone is a price taker having no individual influence on a market Elasticity measures howmuch one variable changes in response to the change in another variable 1 There are four cases of elasticity that will be discussed a Price elasticity of demand b Cross price elasticity of demand c Income elasticity of demand d Price elasticity of supply The price elasticity of demand is the ratio of the percent change in quantity demanded to the percent change in the price 1 To calculate the price elasticity of demand we calculate the percent change in quantity demanded and percent change in price 2 To calculate percent change in quantity demanded Change in quantity demandedInitial quantity demandedx100 3 To calculate percent change in price Change in priceInitial pricex100 4 Put the two equations together to find price elasticity of demand PED PED change in quantity demandedchange in price The important point of finding the price elasticity of demand is being able to interpret it in a market 1 Elastic demand is the when the quantity demanded changes relatively more than the price does a Price elasticity of demandgtl 2 Unit elastic is when price elasticity of demandl 3 Inelastic demand is when the quantity demanded changes relatively less than the price does b Price elasticity of demandltl Note that elasticity is proportional and intuitive if something is elastic it moves easily so if the price elasticity of demand is high it will easily be impacted by changes in price 4 To see it graphically think about the word itself Inelastic begins with I a vertical letter The inelastic graph is very vertical Elastic begins with E which has horizontal lines The elastic graph is horizontal 5 There are two very rare and extreme cases a Perfectly elastic is where any price increase will cause quantity demanded to drop to 0 totally horizontal line b Perfectly inelastic is where the quantity demanded does not respond to changes in price seen as a vertical line


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