putting supply & demand together eco 284 - foster price controls distortions to the supply &...
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Putting Supply & Demand Together
ECO 284 - Foster
Distortions to theSupply & Demand Model:
Price ControlsPrice Controls
Putting Supply & Demand Together:The Market for Cameras
What is the equilibrium price and quantity?
What happens at P=$70?
What happens at P=$25?
Supply
Demand
30 35 80 115 150
$70
$50
$25
Price
Quantity
The Market for Cameras
What does the area under Demand represent?
$79.99
$78.59 $75.99
$72.99 $70.99
Demand
$50
Quantity
Price
$80
80
= $50*(80) + (.5)*($30)*(80) = $4000 + $1200
= $5,200$5,200But, consumers paid . . . $4,000; so
Consumer Surplus = Consumer Surplus = $1,200$1,200
Area = Total consumer value
Why does it take a higher price to induce producers to increase
the quantity supplied?
The Market for Cameras
What does the area under Supply represent?
Supply
80
$50
Quantity
Price
$10
They need to offer higher payments to attract resources from their alternative uses…
Their next best uses.
And, what is that worth? Area = $10*80 + (.5)*$40*80 = $2,400
Producer Surplus = Producer Surplus = $4000 - $2,400
= $1,600= $1,600
The Market for Cameras
Freely functioning markets tend to maximize the consumer and
producer surplus.
They maximize the value we get from our limited
resources.
Supply
Demand
80
$50
Quantity
Price Consumer
Surplus
Producer Surplus
What is so good about What is so good about markets?markets?
Markets are an efficient mechanism in determining “What to produce?”
Distortions to the Supply & Demand Model:
Price Controls – Price CeilingsPrice Ceilings
A price ceiling is a maximum (legal) price.
To be “effective” it must be set below Pe
What problem does this cause?
How is it resolved?
Quantity
Price
Pe
P*
Qe QDQS
Supply
Demand
Price Controls – Price CeilingsPrice Ceilings
Lost surplus means lost value.
Consumer payments may rise to well above Pe.
Sellers have incentives to charge &consumers have an incentive to pay.
Quantity
Price
Pe
P*
Qe QDQS
Supply
Demand
A price floor is a minimum (legal) price.
To be “effective” it must be set above Pe
What problem does this cause?
How is it resolved?
Quantity
Price
Pe
P*
QeQDQS
Supply
Demand
Price Controls – Price FloorsPrice Floors
Lost surplus means lost value.
Example: Butter.
Quantity
Price
Pe
P*
QeQDQS
Supply
Demand
And, it gets even worse … Government stores surplusResources produce goods that we can’t have; we consume less;
inefficient.
It gets worse … Government buys surplus
Price Controls – Price FloorsPrice Floors
Example: Min. wage.
Gov’t doesn’t buy excess.
Violators are fined.
Quantity
Price
Pe
P*
QeQDQS
Supply
DemandMust a minimum wage result in a surplus of
unsold labor?
Yes, if it is an effective price floor, it must.
Price Controls – Price FloorsPrice Floors
Supply & Demand ProblemsSupply & Demand Problems
#1. In the market for oranges, what will happen if there is great weather in Florida and California?
Supply
Demand
Price
Quantity
Pe
Qe
Supply
Demand
Price
Quantity
Pe
Qe
New Supply
New Price
NewQuantity
Supply increases;price falls; output rises
Supply & Demand Supply & Demand ProblemsProblems#1. In the market for oranges, what will
happen if there is great weather in Florida and California?
Putting Supply & Demand Together
ECO 284 - Foster
Distortions to theSupply & Demand Model:
Price ControlsPrice Controls
Distortions to the Supply & Demand Model:
Price ControlsPrice Controls
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