ECON1123-CH5-NOTES
Iceland and government intervention on pricing of oil lamps
-A price floor, or minimum price of 15 Krona, will not change the situation at all. Setting a minimum price below the equilibrium price will not change the demand or supply since sellers and buyers already have a better equilibrium price available. Although buyers would love to pay only 15 Krona for a lamp, the equilibrium price is greater than the minimum price the buyers are willing to pay. -Price ceilings, or maximum prices, can create shortages of a good, but if the price ceiling is set above the equilibrium price, the price ceiling will have no effect. When this occurs, we say the price ceiling is not binding. Logically speaking, if the equilibrium price is 25 Krona, there is no logical reason why rational sellers would charge 40 Krona if there will be a surplus at that point.
a minimum wage example
A minimum wage is a legal minimum that can be paid to workers. At a wage of $8 an hour, 300 workers are willing to work and firms are willing to hire 100 workers. This is determined by lining up the $8 on the vertical axis with the demand and supply curves. When quantity supplied is larger than quantity demanded, a surplus results. The amount of the surplus is the difference between quantity supplied and quantity demanded.
price controls and quotas: meddling with markets generals
Because the price ceiling is set below the equilibrium price, it is a binding price control, and the price of corn becomes $7. The graph indicates that sellers are willing to sell 5 bushels at this price while buyers are willing to buy 10.86 bushels. All transactions where both a willing buyer and seller exist will take place. Therefore, 5 bushels are bought and sold. At $7, quantity demanded (10.86 bushels) is greater than quantity supplied (5 bushels). Not enough supply to meet demand is called a shortage. The amount of a shortage is the difference between quantity demanded and quantity supplied. 10.86 bushels minus 5 bushels equals a shortage of 5.86 bushels.
consumer surplus
Consumer surplus (CS) is the difference between a consumer\'s willingness to pay and the market price. Ordering the buyers by their willingness to pay in descending order, we have Felix, Lauren, Drew, and Oscar. However, Oscar's willingness to pay is below the sales price, and thus he will not participate in this market (and this news makes him very grouchy). Felix has the highest willingness to pay of $500. With a market price of $150, Felix receives a consumer surplus of CS = WILLINGNESS TO PAY - MARKET PRICE = 500-150 = 350 Next, Lauren has a consumer surplus of $250, and then Drew receives a producer surplus of $150. The sum of these three individual results is the total consumer surplus of $750. Although Oscar was unable to buy a netbook, he and Felix became roommates and shared Felix's netbook. That worked out well - until Drew set up Felix and Lauren on a date, not realizing that Oscar had a crush on Lauren. Things got rather messy after that. Last they heard, Oscar had dropped out of school and was living in a trash can.
label the following scenario with the appropriate terms.
Ivan, a Russian fishermen, needs a permit so that he can commercially participate in ice fishing for yellow perch and then the consequent sales. - LICENSE garet is an undergraduate student who has to work at McDonald's part time to help pay his tuition loans. Always looking on the bright side of things, he is thankful that he can't make less than what he is earning, $7.25 an hour. PRICE FLOOR D'Artagnan, a poor French noblemen, discovers a large cache of truffles in his backyard. However, the government caps the sale of truffles a $100 a pound, which frustrates D'Artagnan as he knows they are worth more than that. PRICE CEILING Athos is an avid collector of swords, but as they are illegal to purchase, he goes by illicit (forbidden by law) means to obtain them. BLACK MARKET to help out Irish farmers, the government sets the minimum price of potatoes at $26 a bushel. - PRICE FLOOR In order to support domestic sales of textiles, the country of Germany puts a cap on the amount of foreign textiles it imports. - QUOTA
quota
Prior to government regulation, Alaskan king crab's equilibrium price is at $3.50 a pound, a price where there were buyers for every supplier. However, due to environmental issues, a quota, or upper limit on king crab is implemented, reducing the amount of king crab that is caught. For 15 million pounds of crab, buyers are willing to pay $4.00 while sellers are willing to accept only $3.00. Using the proper terminology, the supply price at this QUOTA is $3 a pound while the demand price is $4 a pound. Firms actually receive $4.00 even though they would be willing to take the lower price. The difference between these prices is called a quota rent: QUOTA RENT = DEMAND PRICE - SUPPLY PRICE quota creates another issue. There exists mutually beneficial transactions that still could take place, but because of the quota, the transactions can't take place and there exists deadweight loss,, represented by the area of the triangle. This triangle (A, B, E) represents the loss in total surplus rendered by inefficiency.
refer to a supply and demand schedule, select price controls that represent binding
equilibrium price is $600 qd=100,000 qs = 100,000 price floor (minimum price) MUST be above equilibrium >600 price ceiling (maximum price) MUST be below equilibrium <600
COMPLEMENTS
ex: car and gas. people have x amount of money. car cost rises, less money for gas so demand dwindle. car cost falls, more money for gas so demand rises.
deadweight loss
the reduction in social surplus associated with deviating from the equilibrium. Price floors and price ceilings typically result in deadweight loss.
more on price ceiling and black market
The price control that acts to keep prices below a certain level is a price ceiling. Price ceilings, however, create inefficiencies in both production (how much is produced) and allocation (who consumes the good). Because of the shortage caused by the price ceiling, we often see the rise of black markets to supply the good to those who cannot get it at the government price. Black markets are known to be places that sell goods illegally, either because the good itself is illegal (such as contraband or in this case the web cookie), or the price of the good is higher than that of the price ceiling (such as the Mrs. Field\'s cookie). Items sold for a price less than the price ceiling are legal and can describe any normal market, though it may not be advisable for a company to price below the price ceiling. Flour is an input for cookies, but the government does not place any price restrictions on flour, so selling it at $3 a bag is not illegal, and thus not part of the black market.
price floor minimum price
effective price floor above equilibrium. loss in consumer surplus/producer surplus and deadweight wellfare loss (DWL) LOSS CS + LOSS PS = DEADWEIGHT WELFARE LOSS bargain of switching hands benefit depends on comparing the SQUARES and TRIANGLE minimum wage is price floor (living wage) trade offs in terms of having some workers getting a higher wage while someone won't get a job.
match the descriptions below with the appropriate term. it is possible that more than one description should be matched with each term or that a description should not be matched with any of the terms.
government making it illegal to charge a price above a certain threshold. - PRICE CEILING. the difference between what a person is willing to pay for a good and what they actually pay. - CONSUMER SURPLUS. The difference between the price a firm receives for a good and the actual cost of that good. - PRODUCER SURPLUS. measure of the reduction in social welfare associated with an inefficient outcome - DEADWEIGHT LOSS when the price of a good is forced above the quilibrium price. - PRICE FLOOR
market for peaches and cream
peaches and cream are complements. gov concern peaches is over-priced place price ceiling (below equil) on market for peaches price of milk (input for cream) increases. ANSWERS: When the price of an input (milk) increases => then supply for cream will decrease. A decrease in supply shifts the supply curve to the left (or in). At each price, quantity supplied decreases. When the supply curve decreases, the equilibrium price of cream increases and the equilibrium quantity of cream decreases. When the price of cream increases, then the demand for its complement decreases. People will buy less cream and fewer peaches. This will shift the demand curve to the left. When demand for peaches shifts to the left, the equilibrium price and quantity for peaches both decrease. But, since there is a price ceiling, then the price won\'t decrease right? Wrong. The price ceiling is a legal maximum on the price that peaches can be bought for. When the equilibrium price falls, then the price ceiling will have no effect. The peaches will cost less than the price of the price floor. So, QD = QS, but it is less than 5,000, and the price will be less than $3.
price ceiling and price floor examples
price ceiling of $1 in restaurants quantity demanded ROSE quantity supplied DECREASE shortage price floor of $10 in restaurants quantity supplied ROSE quantity demanded DECREASE surplus ANSWERS: -Price ceilings that enforce a maximum price can have inefficient consequences. Quality and quantity typically decrease when price ceilings are implemented. Firms are willing to sell fewer units when a price ceiling brings the price below the equilibirum price, causing the number of units bought/sold to decrease. Quality often declines since there is no incentive for producers to supply higher quality goods or services without the ability to raise prices. Black markets and illegal activity such as selling above the price ceiling can occur as well. Lastly, resources will be wasted, such as people\'s time (an opportunity cost), in the hopes of cheap food. -Price floors have similar results. Surpluses result because quantity supplied exceeds quantity demanded at the artificially high price. **Given that there are more goods for sale than willing buyers at this price, firms sometimes try to attract business by increasing the quality of the good. Here, restaurants might up the standards on their food even though poor college students would be more content with something less fancy (such as the Cordon Bleu). Price floors also lead to waste of resources and less efficiency since people are less inclined to buy food at this price. Finally both price ceilings and price floors will reduce the number of units that are bought/sold. For an exchange to occur, there must be both a willing buyer and a willing seller. When price ceilings bring down the price, there are fewer sellers willing to sell, resulting in a lower quantity. In the case of a higher price due to a price floor, there fewer buyers are willing to buy. Both types of price controls therefore result in fewer goods being exchanged than would have in the absence of any price control.
costs of setting price ceilings and price floors
price ceilings to help renters in expensive areas keep rents artificially low. Some costs associated are: ALL -The development of black markets -the requirement of nonrefundable cleaning deposits -reductions in apartment quality an increased emphasis on informal -connections in allocating apartments -the requirement of nonrefundable key deposits -an increased level of subletting. When the price is forced below the equilibrium price, a shortage results. This shortage changes behavior in rental markets as there are relatively many people trying to find apartments and relatively few apartments available for rent. Landlords respond by finding other ways to extract money from tenants or to lower costs. Concocted fees like "nonrefundable cleaning deposits" or "nonrefundable key deposits" are sometimes charged (note that a true deposit would be refundable). Landlords will sometimes require secret side payments on top of the official rent-controlled level of rent. Landlords may also try to save money by allowing the quality apartments to deteriorate. Tenants in rent-controlled apartments may react to the price control by subletting to others at higher rates of rent. Finally, if price is not used to allocate a good, another process must be used. Connections and personal relationships often become more important in allocating rent controlled apartments.
cookie monster!!!
price rose so high gov wants to control it. make it affordable to citizens. lower price by setting a price ceiling below the equilibrium price. as a result of the price control, a covert bazaar (fundraising sales of goods, typically for charity, a alarge shop selling miscellaneous goods) for cookies arises
Price ceiling maximum price
restriction on how high prices can go usually under equilibrium to be effective. usually lead to a shortage or excess of demand. some producer surplus goes to consumer surplus. net change of 0 Designed to aid consumers (at the expense of producers) BUT it si better only when they give up less than the benefit of the gain. gas price ceiling. Long long line at the gas station. instead of money, you pay time and effort. price gouching (prevent taking advantage of people due to circumstances they can't control).
