Graph the curves in Exercises 105–108. Explain the relationship between the curve’s formula and what you see.
Supply demand and equilibrium ch 6, 8 Government policy and equilibrium prices - So at the equilibrium price where (Qd=Qs) total surplus (gains from trade) equal s the area above supply and below demand o Gains from trade are a measure of how much better off the operation of markets make us - However, gov’t official- and yes we the voters often do not like market prices and quantities o “price gouging” - Can gov’t action produce “better” prices Government intervention in markets - Gov’t intervention in markets is common - We will look at 2 regulatory tools: o Price controls (ch 8) Price ceilings Price floors o Taxes and subsidies (ch 6) Price Controls (ch 8) - Price ceiling- legislated maximum price o Ex: Rent controls Gas in 1970’s Many goods in WWII o Real life ex: widgets Assume the equilibrium price of widgets is $60 and quantity is 40 million But a price of $60 for a widget is clearly “unreasonable and unaffordable” says Bernie, who pushes for a max widget price of $25 Lost consumer surplus+ lost producer surplus=deadweight surplus o Numerical ex: Qd = 100 – P equilibrium price = $60 Qs = P – 20 Equilibrium price = $40 Set max price of 25 Bernie says people won’t buy more at lover price “only what they need” and production of widgets won’t be effected (companies still make profits” Conusmers DO buy more widgets at a lower price: Qd rises to (100-25) = 75 Suppliers DO supply fewer widgets at lower prices: Qs falls to (25-20) = 5 A widget shortage (75-5) of 70 is created Ceiling set above equilibrium: doesn’t effect anything (non- binding) o Possible effects of price ceilings Price ceilings can cause time to be wasted in line Can cause a misallocation of resources Since there is a shortage and prices cant adjust, highest value demanders don’t necessarily get the good Price ceilings can cause reductions in product quality Maybe instead of lowering quantity supplied when price drops, producers simply produce a lower quality good (cheaper for them to make) - Price floor- legislated minimum price – a legal minimum on the price at which a good can be sold o Ex Minimum prices for agricultural products (milk) To keep the little farmers around against big companies who can afford to put up super low prices) o Price floors create Surpluses A loss in gains from trade Wasteful increase in quality Misallocation of resources Note: a price floor must be binding (ie set ABOVE the equilibrium price) to have an effect on the market) o Quick overview of the market for labor What determines the wage for a job Supply and demand Supply: (workers) opportunity cost o Will you take a job at $5 per hour Depends on value of your next best alternative (might be another wage) might be leisure (((((REST ON Bb))) Demand (employers) benefit (value generated) o Ex: minimum wage: Higher wages, more job seekers (Q* Qs) Higher wages, fewer job offers (Q* Qd) Creates a surplus of workers (Qs – Qd) What workers are most affected by minimum wage Low skilled labor! - Price controls- bottom line o Price controls reduce gains from trade, making society worse off o Although a lucky few may be able to buy or sell at the controlled prices, the controls lead to a lot of inefficiencies! Shortages Surpluses Black markets Long lines Lower quality goods o If you seek to help the poor, give the money (ex. Earned income tax credit) o Don’t mess with prices! Prices signal important info about benefits and costs. Price controls prevent them from doing so o Ex: rent controls Regulation to keep rets from rising to equilibrium prices Creates shortages Gets worse over time