ECON Lecture 4
Steps for Determining a Price Control
1. Determine who the price control is designed to protect. -Protect the consumer = Price Control Ceiling -Protect the producer = Price Control Floor 2. Determine whether the price control is binding or non-binding. -Price Control Ceiling and ceiling price is above the equilibrium price = non-binding -Price Control Floor and floor price is below the equilibrium price = non-binding. 3. If price control is a binding price floor, it will lead to a surplus. If price control is a binding price ceiling, then it will lead to a shortage.
Normals Good
A good of which the demand increases as income increases. -Better food (steak, seafood, lamb) -Better Clothes (gucci) -Better cars (bmw, lexus)
Neutral Good
A good the demand for which does not change as income rises or falls. -Toothpaste -Deodorant
Inferior Good
A good the demand for which falls as income rises. -Foods (Mac n Cheese) -Clothes (generic labels) -Cars (geo)
Binding Price Ceiling
A max price imposed below the equilibrium price. Policy makers want to give consumers lower prices. -Creates Shortages. -Lead to Underground Markets -Motivate People to Become Creative -Often Lead to Bigger Price Increases in the Future.
Price Control: Price Ceiling
A max price imposed on the market. Prices are not allowed to rise above this price. -Rent Controls -Retail Gasoline Markups (state imposed) -Predatory/Usurious Interest Rates
Binding Price Floor
A minimum price imposed above the equilibrium price. Policy makers want to give producers a higher price. -Creates a Surplus. -Sometimes Lead to Underground markets. -Produces feelings of Entitlement. -Creates a Bureaucracy to Support it. -Creates other Unintended Consequences (Environment).
Non-Binding Price Floor & Unemployment
A minimum price imposed below the equilibrium price. When minimum wage is below the equilibrium wage, it is possible to raise the minimum wage without causing unemployment because employers are already paying employees an equilibrium wage which is higher than the minimum wage.
Price Control: Price Floor
A minimum price imposed on the market. Prices are not allowed to fall lower than this price. -Minimum Wage -Price Supports (used in agriculture) -Government Published Tariffs (Airline Industry, Rail)
Consumer Surplus
Difference between a consumer's max price they will pay and the price the consumer actually pays in the market.
Producer Surplus
Difference between a producer's minimum price they would accept and the price the producer actually receives in the market.
Equilibrium
Point at which the market price has reached the level at which quantity supplied equals quantity demanded.
If price in market is lower than the equilibrium price...
Suppliers will produce less and consumers will want to buy (demand) more so there will be a shortage.
Binding Price Floor & Unemployment
When minimum wage is above the equilibrium wage, then increases in the minimum wage will cause more unemployment because employers are already forced to pay employees an equilibrium wage above the equilibrium wage.
Price Spikes and Constrained Supply
When supply is limited and even a small or "normal" increases in demand will lead to large price increases because of intense price bidding of a scarce resource.
If price in market is higher than the equilibrium price...
the suppliers will want to sell (supply) more and the buyers will want to buy (demand) less which creates a surplus.