Chapter 4 The Market Strikes Back 11 September 2018 ECONOMICS Chapter 4 The Market Strikes Back

Review: Supply and Demand 11 September 2018 Review: Supply and Demand The previous lesson focused on demand and supply, we studied the demand curve and the supply curve… P Quantity S D

Review: Supply and Demand 11 September 2018 Review: Supply and Demand …and the market equilibrium: P Quantity D S Peq Qeq

Practice More Supply and Demand As a Group answer the Questions that follow the Headlines. What is the market? Has supply or demand change? How will this change affect price? Are there ay other markets that could be affected by this news event?

Practice More Supply and Demand NOW EACH GROUP CREATE YOUR ON HEADLINE FOR ANOTHER GROUP TO ANSWER. What is the market? Has supply or demand change? How will this change affect price? Are there ay other markets that could be affected by this news event?

At this point the number demanded equals the number supplied Economic Equilibrium Equilibrium is the market clearing price and involves the most efficient choice Producers and consumers make the most of their limited resources at the least cost Therefore, producers and consumers act in their own economic self-interest when moving towards equilibrium At this point the number demanded equals the number supplied

100 200 300 400 500 supply equilibrium demand $60 $50 $40 $30 $20 $10   $50 $40 Price $30 $20 $10 100 200 300 400 500 Units supply equilibrium demand

Shortage and Surplus Shortage occurs when a good or service is priced below the market clearing price Supply < Demand (Not enough Goods for the Number of Buyers) Surplus occurs when a good or service is priced above the market clearing price Supply > Demand (Not enough Buyers for the Number of Goods)

P2 Surplus Shortage P3

Not all markets are ones in which price is allowed to move freely Not all markets are ones in which price is allowed to move freely. Governments may decide to set prices for various reasons. These government set prices may be different than the market clearing price. Talk to your face partner about examples/reasons when the government might step in and regular the price of goods and services.

Not all markets are ones in which price is allowed to move freely Not all markets are ones in which price is allowed to move freely. Governments may decide to set prices for various reasons. These government set prices may be different than the market clearing price. Talk to your face partner about examples/reasons when the government might step in and regular the price of goods and services. 0:39 0:38 0:40 0:42 0:43 0:37 0:41 0:35 0:31 0:30 0:32 0:33 0:44 0:34 0:36 0:46 0:54 0:53 0:55 0:56 0:58 0:57 0:52 0:51 0:47 0:29 0:48 0:49 0:50 0:45 0:28 0:08 0:07 0:09 0:10 0:12 0:11 0:06 0:05 End 2:00 0:01 0:02 0:04 0:03 0:13 0:14 0:23 0:22 0:24 0:25 0:27 0:26 0:21 0:20 0:16 0:15 0:17 0:18 0:19 0:59 1:01 1:41 1:40 1:42 1:43 1:45 1:44 1:39 1:38 1:33 1:32 1:34 1:35 1:37 1:36 1:46 1:47 1:56 1:55 1:57 1:58 2:00 1:59 1:54 1:53 1:49 1:48 1:50 1:51 1:52 1:31 1:30 1:10 1:09 1:11 1:12 1:14 1:13 1:08 1:07 1:03 1:02 1:04 1:05 1:06 1:15 1:16 1:25 1:24 1:26 1:27 1:29 1:28 1:23 1:22 1:18 1:17 1:19 1:20 1:21 1:00

11 September 2018 Price controls Price controls are legal restrictions on how high or low a market price may go. 2 kinds of price controls: Price Ceilings: a maximum price sellers are allowed to charge for a good. It’s an upper limit for the price. Price Floors: a minimum price buyers are required to pay for a good. It’s a lower limit for the price.

Price controls Why Price controls? 11 September 2018 Price controls Why Price controls? During crisis times, emergencies or wars the government wants to protect the consumers from rapidly increasing prices. If the equilibrium wage given by supply and demand for low skilled workers is below poverty level, the government can set a minimum wage.

Price controls: price ceilings 11 September 2018 Price controls: price ceilings Equilibrium Price ceiling D Quantity of icecreams Price 3 2 200 800 4 S 100 Shortage Price Ceiling D Quantity of icecreams Price 3 2 200 4 S 100

Price controls: Price Celings in Apartments 11 September 2018 Price controls: Price Celings in Apartments

Price controls: price floors 11 September 2018 Price controls: price floors Equilibrium Price floor D Quantity of icecreams Price 3 2 200 4 S 100 D Quantity of icecreams Price 3 2 200 600 4 S 100 Surplus Price Floors

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Price controls: price ceilings 11 September 2018 Price controls: price ceilings Because of these ceilings, we are faced with a shortage. The shortage will lead to inefficiencies: A market or an economy is inefficient if there are missed opportunities: some people could be made better off without making other people worse off.

Price controls: price ceilings 11 September 2018 Price controls: price ceilings Let’s take a look at the different possible inefficiencies: Inefficient Allocation to Consumers Wasted Resources Inefficiently Low Quality Black Markets

Price controls: price ceilings 11 September 2018 Price controls: price ceilings Inefficient Allocation to Consumers Price ceilings can lead to inefficiency in the form of inefficient allocation to consumers: people who really want the good and are willing to pay a high price don’t get it, and those who are not so interested in the good and are only willing to pay a low price do get it. Example: rent control. In such case people get the appartment usually through luck or personal connections.

Price controls: price ceilings 11 September 2018 Price controls: price ceilings Wasted Resources Price ceilings typically lead to inefficiency in the form of wasted resources: people spend money, time and expend effort in order to deal with the shortages caused by the price ceiling. You waste a lot of time looking for a good (e.g. an appartment) in case of shortage, the time has it’s value! You can work or just rest, do something better than look for a good you’ can’t find.

Price controls: price ceilings 11 September 2018 Price controls: price ceilings Inefficiently Low Quality Price ceilings often lead to inefficiency in that the goods being offered are of inefficiently low quality In case of rent controls, the landlords will not improve the conditions of the appartments, there is no incentive since the rental fee is low but the main reason is that since there is a shortage, people are willing to rent the apartment as it is, even in bad condition!

Price controls: price ceilings 11 September 2018 Price controls: price ceilings Black Markets A black market is a market in which goods or services are bought and sold illegally—either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling. If someone for example bribes (gives extra money) to the apartment owners he will get the apartment, but the honest people that don’t break the law will never find one this way!

Price controls: price floors 11 September 2018 Price controls: price floors Price Floors: a minimum price buyers are required to pay for a good.I’ts a lower limit for the price. The minimum wage is a legal floor on the wage rate, which is the market price of labor.

Price controls: price floors 11 September 2018 Price controls: price floors Why a Price Floor Causes Inefficiency Inefficient Allocation of Sales Among Sellers Price floors lead to inefficient allocation of sales among sellers: those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it. Example: Farm Subsidies Wasted Resources Like a price ceiling, a price floor generates inefficiency by wasting resources.

Subsidies The United States subsidizes certain industries like farming 11 September 2018 Subsidies The United States subsidizes certain industries like farming Subsidies are a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry

Price controls: price floors 11 September 2018 Price controls: price floors Inefficiently High Quality and Quantity Price floors often lead to inefficiency in that goods of inefficiently high quality are offered: sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price. Or the seller offers more quantity than is demanded and we are left with a surplus