©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 4 the power of prices

1 ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

ECONOMICS: ECONOMICS: EXPLORE & APPLYEXPLORE & APPLYby Ayers and Collingeby Ayers and Collinge

CHAPTER 4CHAPTER 4“The Power of Prices”“The Power of Prices”

CHAPTER 4CHAPTER 4“The Power of Prices”“The Power of Prices”


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

1.1. Interpret how demand represents marginal Interpret how demand represents marginal benefit and supply marginal cost.benefit and supply marginal cost.

2.2. Explain the concept of social surplus and how Explain the concept of social surplus and how it is divided between consumers and it is divided between consumers and producers.producers.

3.3. Demonstrate how both exports and imports Demonstrate how both exports and imports increase efficiency while simultaneously increase efficiency while simultaneously harming either consumers or producers.harming either consumers or producers.

4.4. Identify inefficiencies associated with price Identify inefficiencies associated with price ceilings.ceilings.

1.1. Interpret how demand represents marginal Interpret how demand represents marginal benefit and supply marginal cost.benefit and supply marginal cost.

2.2. Explain the concept of social surplus and how Explain the concept of social surplus and how it is divided between consumers and it is divided between consumers and producers.producers.

3.3. Demonstrate how both exports and imports Demonstrate how both exports and imports increase efficiency while simultaneously increase efficiency while simultaneously harming either consumers or producers.harming either consumers or producers.

4.4. Identify inefficiencies associated with price Identify inefficiencies associated with price ceilings.ceilings.


Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4.4. Show why price supports are unnecessary Show why price supports are unnecessary and politically counterproductive.and politically counterproductive.

5.5. (E&A) Pinpoint the economic flaw in (E&A) Pinpoint the economic flaw in California's deregulation of electricity.California's deregulation of electricity.

4.4. Show why price supports are unnecessary Show why price supports are unnecessary and politically counterproductive.and politically counterproductive.

5.5. (E&A) Pinpoint the economic flaw in (E&A) Pinpoint the economic flaw in California's deregulation of electricity.California's deregulation of electricity.


4.14.1PRICE SIGNALS FOR EFFICIENT PRICE SIGNALS FOR EFFICIENT CHOICECHOICE

4.14.1PRICE SIGNALS FOR EFFICIENT PRICE SIGNALS FOR EFFICIENT CHOICECHOICE

The The marketplacemarketplace depends upon price signals. depends upon price signals. The The market pricemarket price sends a message to consumers sends a message to consumers and producers.and producers.

For consumers market price signals how much of a For consumers market price signals how much of a good they wish to buy.good they wish to buy.For producers it signals how much of a good they For producers it signals how much of a good they wish to sell.wish to sell.

When market price falls consumers respond by When market price falls consumers respond by buying more, and producers respond by selling buying more, and producers respond by selling less.less.

The The marketplacemarketplace depends upon price signals. depends upon price signals. The The market pricemarket price sends a message to consumers sends a message to consumers and producers.and producers.

For consumers market price signals how much of a For consumers market price signals how much of a good they wish to buy.good they wish to buy.For producers it signals how much of a good they For producers it signals how much of a good they wish to sell.wish to sell.

When market price falls consumers respond by When market price falls consumers respond by buying more, and producers respond by selling buying more, and producers respond by selling less.less.


Consumer SurplusConsumer SurplusConsumer SurplusConsumer Surplus

Consumer surplusConsumer surplus is how much the good is is how much the good is worth to the consumer, in the abstract, worth to the consumer, in the abstract, minus what the consumer actually paid for it.minus what the consumer actually paid for it.

Consumer surplusConsumer surplus is how much the good is is how much the good is worth to the consumer, in the abstract, worth to the consumer, in the abstract, minus what the consumer actually paid for it.minus what the consumer actually paid for it.

Consumer Surplus = Demand - Market PriceConsumer Surplus = Demand - Market PriceConsumer Surplus = Demand - Market PriceConsumer Surplus = Demand - Market Price


Marginal Benefit and Marginal Benefit and Consumer SurplusConsumer Surplus

Marginal Benefit and Marginal Benefit and Consumer SurplusConsumer Surplus

1 2 3

DemandDemandDemandDemand

$

Quantity

The demand curve showsThe demand curve showsthe maximum price thethe maximum price the

consumer would payconsumer would payfor each quantity thatfor each quantity thatmight be purchased.might be purchased.

The maximum price is The maximum price is the consumer’s the consumer’s marginal marginal benefitbenefit – the incremental – the incrementalvalue of each additionalvalue of each additional

item consumed.item consumed.



PricePrice QuantityQuantity

$20$20 11

$15$15 22

$10$10 33

QuantityQuantityMarginal Marginal BenefitBenefit

Total Total BenefitBenefit

11 $20$20 $20$20

22 $15$15 $35$35

33 $10$10 $45$45

Dwight’s demandDwight’s demandfor blue jeans.for blue jeans.

Dwight’s benefits from buyingDwight’s benefits from buyingblue jeans.blue jeans.




$20$20 11

$15$15 22

$10$10 33

Total Total BenefitBenefit

Total PaidTotal PaidConsumer Consumer

SurplusSurplus

$20$20 $20$20 $0$0

$35$35 $30$30 $5$5

$45$45 $30$30 $15$15

Dwight’s demandDwight’s demandfor blue jeans.for blue jeans.

Dwight’s benefits from buyingDwight’s benefits from buyingblue jeans.blue jeans.



1 2 3


$

Quantity

Price=$10

Consumer surplusConsumer surplusin general.in general.

The The consumer consumer surplussurplus is the is thearea under the area under the demand curve and demand curve and above the market above the market price. It is what price. It is what consumers gainconsumers gainfrom their purchasesfrom their purchasesafter deducting the after deducting the cost. cost.

The The consumer consumer surplussurplus is the is thearea under the area under the demand curve and demand curve and above the market above the market price. It is what price. It is what consumers gainconsumers gainfrom their purchasesfrom their purchasesafter deducting the after deducting the cost. cost.



1 2 3


$

Quantity

Price=$10

At a price of $10 per At a price of $10 per pair of jeans, Dwight pair of jeans, Dwight buys three pair, and buys three pair, and receives $15 worth of receives $15 worth of consumer surplus. consumer surplus. His consumer His consumer surplus equals the surplus equals the sum of the consumer sum of the consumer surplus from the 1st, surplus from the 1st, 2nd, and 3rd pair of 2nd, and 3rd pair of jeans. jeans. $10 +$5 + $0 =$15.$10 +$5 + $0 =$15.

At a price of $10 per At a price of $10 per pair of jeans, Dwight pair of jeans, Dwight buys three pair, and buys three pair, and receives $15 worth of receives $15 worth of consumer surplus. consumer surplus. His consumer His consumer surplus equals the surplus equals the sum of the consumer sum of the consumer surplus from the 1st, surplus from the 1st, 2nd, and 3rd pair of 2nd, and 3rd pair of jeans. jeans. $10 +$5 + $0 =$15.$10 +$5 + $0 =$15.

$10

$5

$0


Marginal Cost and Marginal Cost and Producer SurplusProducer Surplus

Marginal Cost and Marginal Cost and Producer SurplusProducer Surplus

The The supply curvesupply curve depicts the minimum price depicts the minimum price that the producers of a good would be willing to that the producers of a good would be willing to accept for each quantity offered.accept for each quantity offered.

That minimum price is the That minimum price is the producer’s marginal producer’s marginal costcost, which is the incremental cost of producing , which is the incremental cost of producing each additional item offered for sale.each additional item offered for sale.

The The producer surplusproducer surplus is equal to the amount by is equal to the amount by which total revenue exceeds the total cost.which total revenue exceeds the total cost.

The The supply curvesupply curve depicts the minimum price depicts the minimum price that the producers of a good would be willing to that the producers of a good would be willing to accept for each quantity offered.accept for each quantity offered.

That minimum price is the That minimum price is the producer’s marginal producer’s marginal costcost, which is the incremental cost of producing , which is the incremental cost of producing each additional item offered for sale.each additional item offered for sale.

The The producer surplusproducer surplus is equal to the amount by is equal to the amount by which total revenue exceeds the total cost.which total revenue exceeds the total cost.


Marginal CostMarginal CostMarginal CostMarginal Cost

SupplySupply

$$

QuantityQuantity11 22 33

Marginal cost increasesMarginal cost increasesas quantity producedas quantity produced

rises.rises.


Producer SurplusProducer SurplusProducer SurplusProducer Surplus


$5$5 11

$7.50$7.50 22

$10$10 33

QuantityQuantityMarginal Marginal

CostCostTotal CostTotal Cost

11 $5$5 $5$5

22 $7.50$7.50 $12.50$12.50

33 $10$10 $22.50$22.50

Buddy’s supplyBuddy’s supplyof blue jeans.of blue jeans.

Buddy’s cost of producingBuddy’s cost of producingblue jeans.blue jeans.



PricePriceQuantity Quantity

SoldSold

$5$5 11

$7.50$7.50 22

$10$10 33

Total CostTotal CostTotal Total

RevenueRevenueProducer Producer SurplusSurplus

$5$5 $5$5 $0$0

$12.50$12.50 $15$15 $2.50$2.50

$22.50$22.50 $30$30 $7.50$7.50

Buddy’s supplyBuddy’s supplyof blue jeans.of blue jeans.

Buddy’s cost of producingBuddy’s cost of producingblue jeans.blue jeans.



SupplySupply

$$


The The producer surplusproducer surplusis the area above theis the area above the

supply curve and supply curve and under the marketunder the marketprice. It is whatprice. It is what

the producers gainthe producers gainfrom their sale from their sale after deductingafter deducting

their cost.their cost.

PricePrice$10$10

Producer SurplusProducer Surplus



SupplySupply

$$


At a price of $10 perAt a price of $10 per pair of jeans, Buddy sells 3pair of jeans, Buddy sells 3

pair and receivespair and receives$7.50 worth of $7.50 worth of producer surplus.producer surplus.His producer surplus equals theHis producer surplus equals the

sum of his producer surplussum of his producer surplusfrom the 1from the 1stst, 2, 2ndnd and 3 and 3rdrd pairs, pairs,

which is $5 + $2.50 +$0which is $5 + $2.50 +$0equals $7.50equals $7.50

PricePrice$10$10

$5$5$2.50$2.50

$0$0


Marginal Benefit and Marginal CostMarginal Benefit and Marginal CostMarginal Benefit and Marginal CostMarginal Benefit and Marginal Cost

Marginal Benefit (to consumers):Marginal Benefit (to consumers): The The value of each additional unit of the good.value of each additional unit of the good. Marginal Cost (to producers):Marginal Cost (to producers): The cost of The cost of resources used to produce each additional resources used to produce each additional unit.unit.The efficient outputThe efficient output occurs when society’s occurs when society’s marginal benefit equals marginal cost.marginal benefit equals marginal cost.

Marginal Benefit (to consumers):Marginal Benefit (to consumers): The The value of each additional unit of the good.value of each additional unit of the good. Marginal Cost (to producers):Marginal Cost (to producers): The cost of The cost of resources used to produce each additional resources used to produce each additional unit.unit.The efficient outputThe efficient output occurs when society’s occurs when society’s marginal benefit equals marginal cost.marginal benefit equals marginal cost.


Market EfficiencyMarket EfficiencyMarket EfficiencyMarket Efficiency

Supply = Marginal Cost

Demand = Marginal Benefit

$

QuantityEfficient Quantity

Equilibrium Price

Consumer Consumer SurplusSurplus

ProducerProducerSurplusSurplus

Social Surplus =Social Surplus =consumer surplusconsumer surplus+ producer surplus+ producer surplus


The Market Equilibrium PriceThe Market Equilibrium PriceThe Market Equilibrium PriceThe Market Equilibrium Price

The market equilibrium price leads to the The market equilibrium price leads to the efficient quantity.efficient quantity.No other quantity would generate a larger total No other quantity would generate a larger total of of consumer and producer surplusconsumer and producer surplus..If the price is less than the equilibrium price, If the price is less than the equilibrium price, quantity falls because producers aren’t willing quantity falls because producers aren’t willing to sell as much. to sell as much. If the price is greater than the equilibrium price If the price is greater than the equilibrium price quantity falls because consumers aren’t willing quantity falls because consumers aren’t willing to buy as much. to buy as much.

The market equilibrium price leads to the The market equilibrium price leads to the efficient quantity.efficient quantity.No other quantity would generate a larger total No other quantity would generate a larger total of of consumer and producer surplusconsumer and producer surplus..If the price is less than the equilibrium price, If the price is less than the equilibrium price, quantity falls because producers aren’t willing quantity falls because producers aren’t willing to sell as much. to sell as much. If the price is greater than the equilibrium price If the price is greater than the equilibrium price quantity falls because consumers aren’t willing quantity falls because consumers aren’t willing to buy as much. to buy as much.


The Market Equilibrium PriceThe Market Equilibrium PriceThe Market Equilibrium PriceThe Market Equilibrium Price

The triangularThe triangular area of area of

forgone social forgone social surplus caused bysurplus caused byinefficient pricinginefficient pricing

is called the is called the deadweight loss. deadweight loss.


The Paradox of Diamonds and WaterThe Paradox of Diamonds and WaterThe Paradox of Diamonds and WaterThe Paradox of Diamonds and Water

S

D

Quantity of Water

Dol

lars

Consumer Consumer SurplusSurplus

Dol

lars

Quantity of Diamonds

D

S

Much smaller Consumer Surplus

Low Price

High price

Water MarketWater Market Diamond MarketDiamond Market


The Efficiency of The Efficiency of Imports and ExportsImports and Exports


Market prices of goods and services only reflect the Market prices of goods and services only reflect the domestic pricesdomestic prices of supply and demand within the of supply and demand within the country, when a country does not engage in country, when a country does not engage in international trade.international trade.When a country opens its markets to international When a country opens its markets to international trade, market prices change as a world of new trade, market prices change as a world of new consumers and producers are involved.consumers and producers are involved.ImportsImports are goods and services bought from other are goods and services bought from other countries.countries.ExportsExports are goods and services sold to other are goods and services sold to other countries.countries.

Market prices of goods and services only reflect the Market prices of goods and services only reflect the domestic pricesdomestic prices of supply and demand within the of supply and demand within the country, when a country does not engage in country, when a country does not engage in international trade.international trade.When a country opens its markets to international When a country opens its markets to international trade, market prices change as a world of new trade, market prices change as a world of new consumers and producers are involved.consumers and producers are involved.ImportsImports are goods and services bought from other are goods and services bought from other countries.countries.ExportsExports are goods and services sold to other are goods and services sold to other countries.countries.




The result of trade is that the price in the domestic The result of trade is that the price in the domestic market will come to equal the world market price.market will come to equal the world market price.

If the domestic price rises to meet a higher world If the domestic price rises to meet a higher world price, then the country exports the good.price, then the country exports the good.If the lower world price causes the domestic price If the lower world price causes the domestic price to drop, then the country imports the good.to drop, then the country imports the good.In either case, there are some people within the In either case, there are some people within the country who gain, and others who lose.country who gain, and others who lose.

The gains however, can be expected to exceed the The gains however, can be expected to exceed the losses.losses.

The result of trade is that the price in the domestic The result of trade is that the price in the domestic market will come to equal the world market price.market will come to equal the world market price.

If the domestic price rises to meet a higher world If the domestic price rises to meet a higher world price, then the country exports the good.price, then the country exports the good.If the lower world price causes the domestic price If the lower world price causes the domestic price to drop, then the country imports the good.to drop, then the country imports the good.In either case, there are some people within the In either case, there are some people within the country who gain, and others who lose.country who gain, and others who lose.

The gains however, can be expected to exceed the The gains however, can be expected to exceed the losses.losses.


4.2 4.2 PRICE CEILINGS AND RENT CONTROLSPRICE CEILINGS AND RENT CONTROLS

4.2 4.2 PRICE CEILINGS AND RENT CONTROLSPRICE CEILINGS AND RENT CONTROLS

Price Ceiling:Price Ceiling: a law that restricts a a law that restricts a price from rising above a certain levelprice from rising above a certain level

Price Freezes:Price Freezes: prohibiting a wide prohibiting a wide array of prices from risingarray of prices from rising

Rent Controls:Rent Controls: laws that limit rent laws that limit rent increases to below what the market increases to below what the market would bearwould bear

Price Ceiling:Price Ceiling: a law that restricts a a law that restricts a price from rising above a certain levelprice from rising above a certain level

Price Freezes:Price Freezes: prohibiting a wide prohibiting a wide array of prices from risingarray of prices from rising

Rent Controls:Rent Controls: laws that limit rent laws that limit rent increases to below what the market increases to below what the market would bearwould bear


Rent ControlsRent ControlsRent ControlsRent Controls

Quantity

Pri

ce (

$’s)

0

Demand

Supply

Q*QS QD

P*

Ceiling Price

Housing

Shortage


Rent Controls over TimeRent Controls over Time

Quantity

Pri

ce (

$’s)

0

Initial Supply

P*

Ceiling Price

Later Supply

Initial Demand

Later Demand

Initial ShortageLater Shortage

P**


Price Gouging and Ticket ScalpingPrice Gouging and Ticket ScalpingPrice Gouging and Ticket ScalpingPrice Gouging and Ticket Scalping

Price Gouging:Price Gouging: The practice of hiking up The practice of hiking up prices to exploit temporary surges in demandprices to exploit temporary surges in demand Ticket Scalping:Ticket Scalping: The practice of buying The practice of buying tickets at the price set by concert promoters tickets at the price set by concert promoters and then reselling at whatever the market and then reselling at whatever the market will bearwill bear

Price Gouging:Price Gouging: The practice of hiking up The practice of hiking up prices to exploit temporary surges in demandprices to exploit temporary surges in demand Ticket Scalping:Ticket Scalping: The practice of buying The practice of buying tickets at the price set by concert promoters tickets at the price set by concert promoters and then reselling at whatever the market and then reselling at whatever the market will bearwill bear


4.3 4.3 PRICE FLOORS/PRICE SUPPORTPRICE FLOORS/PRICE SUPPORT4.3 4.3 PRICE FLOORS/PRICE SUPPORTPRICE FLOORS/PRICE SUPPORT

Price floorsPrice floors and and price supportsprice supports are used are used by government to artificially prop up prices. by government to artificially prop up prices. They establish a minimum price that They establish a minimum price that producers are guaranteed to receive.producers are guaranteed to receive.

Price floorsPrice floors and and price supportsprice supports are used are used by government to artificially prop up prices. by government to artificially prop up prices. They establish a minimum price that They establish a minimum price that producers are guaranteed to receive.producers are guaranteed to receive.


Price Supports and SurplusesPrice Supports and SurplusesPrice Supports and SurplusesPrice Supports and Surpluses

Agricultural Commodity

Pri

ce (

$’s)

0

DemandDemand

SupplySupply

Q* QSQD

P*

Floor Price

Surplus


The Minimum WageThe Minimum WageThe Minimum WageThe Minimum Wage

Increases the price of relatively Increases the price of relatively unskilled labor. unskilled labor.

Higher wage means more people Higher wage means more people willing to work.willing to work.

Higher wage also means fewer jobs Higher wage also means fewer jobs offered.offered.

Increases the price of relatively Increases the price of relatively unskilled labor. unskilled labor.

Higher wage means more people Higher wage means more people willing to work.willing to work.

Higher wage also means fewer jobs Higher wage also means fewer jobs offered.offered.

Result = Surplus of LaborResult = Surplus of LaborResult = Surplus of LaborResult = Surplus of Labor


Minimum Wage LawsMinimum Wage LawsMinimum Wage LawsMinimum Wage Laws

Surplus of labor

Q* QSQD

Demand

Supply

Minimum wage

Fewer Jobs More Applicants

Equilibrium wage

Low-Skill Labor

$

Tony’s required wage

Dave’s required wage


4.44.4AROUND THE WORLD AROUND THE WORLD – Black Markets a Safety Net– Black Markets a Safety Net

4.44.4AROUND THE WORLD AROUND THE WORLD – Black Markets a Safety Net– Black Markets a Safety Net

o Price controls are in effect around the world.Price controls are in effect around the world.o The The “Black Market”“Black Market” exist when people buy and exist when people buy and

sell goods goods illegally.sell goods goods illegally.o This can be seen as the market forces trying to This can be seen as the market forces trying to

assert themselves.assert themselves.

o Black Markets can temper destructive policies.Black Markets can temper destructive policies.o Black Markets act as a safety net and provide Black Markets act as a safety net and provide

people in countries where they exist with people in countries where they exist with necessities they would otherwise have to do necessities they would otherwise have to do without.without.

o Price controls are in effect around the world.Price controls are in effect around the world.o The The “Black Market”“Black Market” exist when people buy and exist when people buy and

sell goods goods illegally.sell goods goods illegally.o This can be seen as the market forces trying to This can be seen as the market forces trying to

assert themselves.assert themselves.

o Black Markets can temper destructive policies.Black Markets can temper destructive policies.o Black Markets act as a safety net and provide Black Markets act as a safety net and provide

people in countries where they exist with people in countries where they exist with necessities they would otherwise have to do necessities they would otherwise have to do without.without.


4.5 EXPLORE & APPLY4.5 EXPLORE & APPLYThe Price of PowerThe Price of Power4.5 EXPLORE & APPLY4.5 EXPLORE & APPLYThe Price of PowerThe Price of Power

In 2001 California lawmakers deregulated the In 2001 California lawmakers deregulated the wholesale electricity market.wholesale electricity market.By increasing supply, the lawmakers felt that By increasing supply, the lawmakers felt that customers would eventually realize savings.customers would eventually realize savings.Unfortunately, crude oil prices doubled, and Unfortunately, crude oil prices doubled, and and caused supply to shift to the left, more than and caused supply to shift to the left, more than the rightward shift caused by deregulation.the rightward shift caused by deregulation.The decrease in the supply of wholesale The decrease in the supply of wholesale electricity caused the wholesale price of electricity caused the wholesale price of electricity to rise sharply.electricity to rise sharply.

In 2001 California lawmakers deregulated the In 2001 California lawmakers deregulated the wholesale electricity market.wholesale electricity market.By increasing supply, the lawmakers felt that By increasing supply, the lawmakers felt that customers would eventually realize savings.customers would eventually realize savings.Unfortunately, crude oil prices doubled, and Unfortunately, crude oil prices doubled, and and caused supply to shift to the left, more than and caused supply to shift to the left, more than the rightward shift caused by deregulation.the rightward shift caused by deregulation.The decrease in the supply of wholesale The decrease in the supply of wholesale electricity caused the wholesale price of electricity caused the wholesale price of electricity to rise sharply.electricity to rise sharply.


The Price of PowerThe Price of Power

Since lawmakers had promised to keep Since lawmakers had promised to keep rates at less than the new equilibrium rates at less than the new equilibrium price, the result was shortages in the price, the result was shortages in the retail electricity market.retail electricity market.

Price ceilings cause shortages!!!Price ceilings cause shortages!!!

Since lawmakers had promised to keep Since lawmakers had promised to keep rates at less than the new equilibrium rates at less than the new equilibrium price, the result was shortages in the price, the result was shortages in the retail electricity market.retail electricity market.

Price ceilings cause shortages!!!Price ceilings cause shortages!!!


Terms along the WayTerms along the WayTerms along the WayTerms along the Way

price signalsprice signals

marginal benefitmarginal benefit

consumer surplusconsumer surplus

producer surplusproducer surplus

social surplussocial surplus

deadweight lossdeadweight loss

price ceilingprice ceiling

price signalsprice signals

marginal benefitmarginal benefit

consumer surplusconsumer surplus

producer surplusproducer surplus

social surplussocial surplus

deadweight lossdeadweight loss

price ceilingprice ceiling

rent controlsrent controlstransfer paymentstransfer paymentssearch costsearch costhousing vouchershousing vouchersprice gougingprice gougingprice floor (price price floor (price support)support)minimum wageminimum wageblack marketblack market

rent controlsrent controlstransfer paymentstransfer paymentssearch costsearch costhousing vouchershousing vouchersprice gougingprice gougingprice floor (price price floor (price support)support)minimum wageminimum wageblack marketblack market


Test YourselfTest YourselfTest YourselfTest Yourself

1.1. If Yvette would be willing to pay up to $10 for If Yvette would be willing to pay up to $10 for one gizmo, up to $8 for a second, and up to $6 one gizmo, up to $8 for a second, and up to $6 for a third, and the price of gizmos is $6 for a third, and the price of gizmos is $6 apiece, then Yvette’s consumer surplus totalsapiece, then Yvette’s consumer surplus totals

a.a. $24.$24.

b.b. $18.$18.

c.c. $6.$6.

d.d. $4.$4.

1.1. If Yvette would be willing to pay up to $10 for If Yvette would be willing to pay up to $10 for one gizmo, up to $8 for a second, and up to $6 one gizmo, up to $8 for a second, and up to $6 for a third, and the price of gizmos is $6 for a third, and the price of gizmos is $6 apiece, then Yvette’s consumer surplus totalsapiece, then Yvette’s consumer surplus totals

a.a. $24.$24.

b.b. $18.$18.

c.c. $6.$6.

d.d. $4.$4.



2.2. If the government places a price ceiling of If the government places a price ceiling of $1.20 on a good which has an equilibrium $1.20 on a good which has an equilibrium price of $1.00 then price of $1.00 then

a.a. there will be a surplus of the good.there will be a surplus of the good.b.b. there will be a shortage of the good.there will be a shortage of the good.c.c. neither a surplus nor a shortage will occur.neither a surplus nor a shortage will occur.d.d. if demand for the good decreases, government if demand for the good decreases, government

will not let the price go below $1.00. will not let the price go below $1.00.

2.2. If the government places a price ceiling of If the government places a price ceiling of $1.20 on a good which has an equilibrium $1.20 on a good which has an equilibrium price of $1.00 then price of $1.00 then

a.a. there will be a surplus of the good.there will be a surplus of the good.b.b. there will be a shortage of the good.there will be a shortage of the good.c.c. neither a surplus nor a shortage will occur.neither a surplus nor a shortage will occur.d.d. if demand for the good decreases, government if demand for the good decreases, government

will not let the price go below $1.00. will not let the price go below $1.00.



3.3. Efficiency requires that Efficiency requires that

a.a. total consumer surplus equal zero.total consumer surplus equal zero.

b.b. market prices be fair.market prices be fair.

c.c. marginal social benefit equal marginal marginal social benefit equal marginal social cost.social cost.

d.d. people buy low and sell high. people buy low and sell high.

3.3. Efficiency requires that Efficiency requires that

a.a. total consumer surplus equal zero.total consumer surplus equal zero.

b.b. market prices be fair.market prices be fair.

c.c. marginal social benefit equal marginal marginal social benefit equal marginal social cost.social cost.




4.4. Over time, rent controls that remain in Over time, rent controls that remain in place lead to place lead to

a.a. increased renovation of old apartments.increased renovation of old apartments.

b.b. a greater ability for tenants to move to a greater ability for tenants to move to the best apartment for their needs.the best apartment for their needs.

c.c. increasingly severe housing shortages.increasingly severe housing shortages.


4.4. Over time, rent controls that remain in Over time, rent controls that remain in place lead to place lead to

a.a. increased renovation of old apartments.increased renovation of old apartments.

b.b. a greater ability for tenants to move to a greater ability for tenants to move to the best apartment for their needs.the best apartment for their needs.

c.c. increasingly severe housing shortages.increasingly severe housing shortages.




5.5. Compared to a free-market equilibrium, Compared to a free-market equilibrium, agricultural price supports have the effect of agricultural price supports have the effect of

a.a. increasing both the quantities supplied and increasing both the quantities supplied and demanded.demanded.

b.b. decreasing both the quantities supplied and decreasing both the quantities supplied and demanded.demanded.

c.c. increasing the quantity supplied and increasing the quantity supplied and decreasing the quantity demanded.decreasing the quantity demanded.


5.5. Compared to a free-market equilibrium, Compared to a free-market equilibrium, agricultural price supports have the effect of agricultural price supports have the effect of

a.a. increasing both the quantities supplied and increasing both the quantities supplied and demanded.demanded.

b.b. decreasing both the quantities supplied and decreasing both the quantities supplied and demanded.demanded.

c.c. increasing the quantity supplied and increasing the quantity supplied and decreasing the quantity demanded.decreasing the quantity demanded.



The End!The End!Next Chapter 5Next Chapter 5

““Measuring National Measuring National Output"Output"

©2004 prentice hall publishing ayers/collinge, 1/e 1 chapter 4 the power of prices

Documents

quantity price

minimum price

producers marginal cost

demand market price

consumer surplus pricequantity

worth of consumer surplus

maximum price

price supports