Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand...
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Transcript of Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand...
![Page 1: Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand Model: Price Controls.](https://reader036.fdocuments.net/reader036/viewer/2022062404/5518abb1550346991f8b4cd2/html5/thumbnails/1.jpg)
Putting Supply & Demand Together
ECO 284 - Foster
Distortions to theSupply & Demand Model:
Price ControlsPrice Controls
![Page 2: Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand Model: Price Controls.](https://reader036.fdocuments.net/reader036/viewer/2022062404/5518abb1550346991f8b4cd2/html5/thumbnails/2.jpg)
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
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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
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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
![Page 5: Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand Model: Price Controls.](https://reader036.fdocuments.net/reader036/viewer/2022062404/5518abb1550346991f8b4cd2/html5/thumbnails/5.jpg)
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?”
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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
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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
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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
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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
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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
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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
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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?
![Page 13: Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand Model: Price Controls.](https://reader036.fdocuments.net/reader036/viewer/2022062404/5518abb1550346991f8b4cd2/html5/thumbnails/13.jpg)
Putting Supply & Demand Together
ECO 284 - Foster
Distortions to theSupply & Demand Model:
Price ControlsPrice Controls
![Page 14: Putting Supply & Demand Together ECO 284 - Foster Price Controls Distortions to the Supply & Demand Model: Price Controls.](https://reader036.fdocuments.net/reader036/viewer/2022062404/5518abb1550346991f8b4cd2/html5/thumbnails/14.jpg)
Distortions to the Supply & Demand Model:
Price ControlsPrice Controls