putting supply & demand together eco 284 - foster price controls distortions to the supply &...

Post on 30-Mar-2015

220 Views

Category:

Documents

0 Downloads

Preview:

Click to see full reader

TRANSCRIPT

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

top related