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Price Controls Legal restrictions on how high or low a market price may go Price Ceiling: –limiting price (on consumer goods to protect consumers welfare) –maximum price a seller can charge Price Floor: –support price (on production factors, e.g. labor) –minimum price a buyer is required to pay

Example: Price Ceiling

The Effects of a Price Ceiling

Figure 3.8,P.70 Example: Rent Controls

Figure 3.9 Example: Assumed Price Controls in the Pizza Market

Problems with Price Ceilings Shortages Inefficiencies –misallocation to consumers –wasted resources –low quality black markets.

Example: Price Floor

The Effects of a Price Floor

Problems with Price Floors Surplus Inefficiencies –misallocation of sales among sellers –Wasted resources –Inefficiently high quality Illegal activity

Price Controls cause Inefficiency Consumer surplus Producer surplus Total surplus Deadweight loss

Recall: Demand--the definition The quantity of a good or service consumers are willing and able to buy at various prices The maximum price the consumer is willing and able to pay for the next unit of the good or service.

Two Different Prices The maximum price the consumers are willing to pay for Vs. The market price the consumers actually paid for

Consumer Surplus Individual consumer surplus –the net gain to an individual buyer from the purchase of a good. –equal to the difference between the buyer s willingness to pay and the price paid.

Consumer Surplus The total consumer surplus generated by purchases of a good at a given price is equal to the area below the demand curve but above that price. Consumer Surplus

A Fall in the Market Price Increases Consumer Surplus Consumer Surplus

Recall: Supply--the definition The quantity of a good or service producers are willing and able to sell at various prices The minimum price the producer is willing and able to accept for providing the next unit of the good or service

Two Different Prices The minimum price the producers are willing to accept Vs. The market price the producers actually get

Producer Surplus and the Supply Curve Individual producer surplus the net gain to a seller from selling a good equal to the difference between the price received and the sellers cost (the minimum price the producer is willing to accept) Total producer surplus the sum of the individual producer surpluses of all the sellers of a good

The total producer surplus from sales of a good at a given price is the area above the supply curve but below that price. Producer Surplus

A Rise in Price Increases Producer Surplus

Putting it together: Total Surplus the total net gain to consumers and producers from trading in the market the sum of the producer surplus and the consumer surplus

Total Surplus Pc Pf

Determination of Price and Quantities D & S together determines P P determines Qd and Qs –Increase in D –Decrease in D –Increase in S –Decrease in S –Increase in D and S –Decrease in D and S –Increase in D and decrease in S –Decrease in D and increase in S What happens to Equilibrium price And Equilibrium quantity?

Recall: factors affecting D price of related goods –complements vs. substitutes income: normal vs. inferior preference expectations (prices, income, … ) population others

Recall: factors affecting S prices of inputs –goods used to produce other goods price of related goods –goods that use the same resources technology expectations others

The Effect on the Market for Tennis Balls of a Decline in Court-Rental Fees (change in price of a related good - complements ) Figure 3.11

The Effect of a Federal Pay Raise on the Rent for Conveniently Located Apartments in Washington, DC (change in income) Figure 3.13

The Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet Access (change in price of a related good - substitute) Figure 3.12

Rules Governing the Effects of Demand Shifts Figure 3.17A & B

Exercise 3.4, P.75 How will a decline in airfare affect –Intercity bus fare –Price of hotel rooms in resort communities Why?

The Effect on the Market for New Houses of a Decline in Carpenters Wage Rates (change in price of an input) Figure 3.15

The Effect of Technical Change on the Market for Term- Paper Revisions (change in technology) Figure 3.16

The Effect on the Skateboard Market The Effect on the Skateboard Market of an Increase in the Price of Fiberglass (change in price of an input) Figure 3.14

Rules Governing the Effects of Supply Shifts Figure 3.17C & D (continued)

The Effects of Simultaneous Shifts in Supply and Demand Figure Researchers prove that the oils in which tortilla chips are fried are harmful to human health 2.The price of corn harvesting equipment falls

The Effects of Extra Border Patrols on the Market for Illicit Drugs Figure 4.1

Equilibrium and Shifts of the Demand Curve

Equilibrium and Shifts of the Supply Curve

Simultaneous Shifts of the Demand and Supply Curves