Students and Shortages By Cliff Nelson December 2015

Two Areas of Focus 1) Students. Teaching techniques and tips to more effectively teach students. 2) Shortages. Economic principles that illuminate the economics that we teach as well as phenomena we observe in our daily lives.

Students A minor deduction of points can carry much weight.

Students A minor deduction of points can carry much weight. On my tests: “Deduction for work done in pen or for work that is hard to follow:_______ (up to 2 points)”

Phrases Zero behind is undefined. 8/0 = undefined.

Phrases Zero behind is undefined. 8/0 = undefined. Hop the line, flip the sign.

Phrases Zero behind is undefined. 8/0 = undefined. Hop the line, flip the sign. Add to y, go high. Add to x, go west.

Phrases Zero behind is undefined. 8/0 = undefined. Hop the line, flip the sign. Add to y, go high. Add to x, go west. OAOAHH HHAOAO

The Skeleton of a Function The skeleton of is.

The Skeleton of a Function The skeleton of is. Example:

The Skeleton of a Function The skeleton of is. Example: Example: Given

Assigning Problems Assign problems ending in 1,5, or 9. Example: 1-31(1,5,9) means 1,5,9,11,15,19,21,25,29,31.

Efficient Grading Most problems are worth 2 points. -1 point for a minor mistake. -2 points for a major mistake or for more than one minor mistake. Longer problems can be broken down into components worth 2 points each.

Rational Expressions Creation Formula

Step 1: Pick any numbers for p, q, r, and b. Step 2: Simplify the formula a=[(q-p)/(r-q)]b Step 3: Plug in the values of the variables into the left side of the equation at the top.

Rational Expression Example Pick p = 5, q = -1, and r = 8.

Rational Expression Example Pick p = 5, q = -1, and r = 8. Pick b = 3. Then a = -2.

Rational Expression Example Pick p = 5, q = -1, and r = 8. Pick b = 3. Then a = -2.

Rational Expression Example Pick p = 5, q = -1, and r = 8. Pick b = 3. Then a = -2.

Shortages Demand Function (in millions of units): Supply Function (in millions of units): p = price per unit Q = quantity in millions

Shortages Demand Function (in millions of units): Supply Function (in millions of units): p = price per unit Q = quantity in millions p Q

Equilibrium Point: (4,6)

At $4 per unit, 6 million units will be both supplied and demanded.

p Q Equilibrium Point: (4,6) (4,6) 4 6

Economics Classes:

p Q

p Q 6 4

Which Variable is Dependent?

Quantity depends on price but price also depends on quantity.

Which Variable is Dependent? Quantity depends on price but price also depends on quantity. The more scarce the material, the higher the price (e.g. gold versus iron ore)

Why Do Markets Gravitate toward the Equilibrium Point?

If the price is higher, a surplus will result.

Why Do Markets Gravitate toward the Equilibrium Point? If the price is higher, a surplus will result. If the price is lower, a shortage will result.

Why Do Markets Gravitate toward the Equilibrium Point? If the price is higher, a surplus will result. If the price is lower, a shortage will result. Market participants, pursuing their own self- interest, will naturally bring supply and demand into equilibrium.

Suppose the price is at $5 per unit.

p Q Surplus: 7.5 – 4 = 3.5 Demand: Supply:

p Q Suppose the price is at $5 per unit Surplus: 7.5 – 4 = million units will be supplied but only 4 million units will be demanded. This results in a 3.5 million unit surplus. Demand: Supply:

Suppose the price is at $3 per unit.

p Q Shortage: 3.5 Demand: Supply:

p Q Suppose the price is at $3 per unit Shortage: 3.5 Demand: Supply: 8 million units will be demanded but only 4.5 million units will be supplied. This results in a 3.5 million unit shortage.

Market Forces Surpluses result in suppliers having excess inventory. They will cut the price in order to clear their inventory.

Market Forces Surpluses result in suppliers having excess inventory. They will cut the price in order to clear their inventory. Shortages result in buyers bidding up the price. Also suppliers, knowing that they will clear all their inventory at a higher price, raise the price in order to get more profit.

Can Shortages and Surpluses Persist?

When market participants are free to act, they will naturally move the market to equilibrium.

Can Shortages and Surpluses Persist? When market participants are free to act, they will naturally move the market to equilibrium. Only when an external coercive force constrains the participants can shortages and surpluses persist.

Can Shortages and Surpluses Persist? When market participants are free to act, they will naturally move the market to equilibrium. Only when an external coercive force constrains the participants can shortages and surpluses persist. The only entity in human society with this effective coercive power is ___________.

Can Shortages and Surpluses Persist? When market participants are free to act, they will naturally move the market to equilibrium. Only when an external coercive force constrains the participants can shortages and surpluses persist. The only entity in human society with this effective coercive power is the government.

Price Controls Price ceilings mandate that the price cannot rise above a certain level. Price floors mandate that the price cannot fall below a certain level.

p Q Shortage: 3.5 Demand: Supply: Price Controls Price ceilings mandate that the price cannot rise above a certain level. If that price is lower than the equilibrium price, the result is a shortage.

Price Controls Price floors mandate that the price cannot fall below a certain level. If that price is higher than the equilibrium price, the result is a surplus.

p Q Surplus: 7.5 – 4 = 3.5 Demand: Supply: Price Controls Price floors mandate that the price cannot fall below a certain level. If that price is higher than the equilibrium price, the result is a surplus.

Are Price Controls Detrimental to Society?

Shortages cause increase search costs.

Are Price Controls Detrimental to Society? Shortages cause increase search costs. Price ceilings lead to quality deterioration (e.g. candy bars during World War II).

Are Price Controls Detrimental to Society? Shortages cause increase search costs. Price ceilings lead to quality deterioration (e.g. candy bars during World War II). Black markets appear.

Are Price Controls Detrimental to Society? Shortages cause increase search costs. Price ceilings lead to quality deterioration (e.g. candy bars during World War II). Black markets appear. Increased enforcement costs.

Are Price Controls Detrimental to Society? Shortages cause increase search costs. Price ceilings lead to quality deterioration (e.g. candy bars during World War II). Black markets appear. Increased enforcement costs. Limits personal freedom.

Price Ceiling Example: Rent Control People hold on to housing space they don’t need.

Price Ceiling Example: Rent Control People hold on to housing space they don’t need. Investors are discouraged from building new apartment units.

Price Ceiling Example: Rent Control People hold on to housing space they don’t need. Investors are discouraged from building new apartment units. Landlords have reduced incentive for upkeep and maintenance.

What Can Be Done?

“[W]e believe that the evidence suggests that zoning is responsible for high housing costs, which means that if we are thinking about lowering housing prices, we should begin with reforming the barriers to new construction in the private sector.” -Glaeser, Edward L. (Harvard) and Joseph Gyourko (Wharton). "The Impact of Building Restrictions on Housing Affordability." FRBNY Economic Policy Review / June Page 23

Price Floor: Minimum Wage Law

p=wage rate ($/hour) Q=quantity of low- skilled labor (thousands of hours/week) Supply (Workers) Demand (Employers) Price Floor: Minimum Wage Law

Demand (Employers) Supply (Workers) p=wage rate ($/hour) Q=quantity of low- skilled labor (thousands of hours/week) At a price of $7.25/hr, low-skilled workers are willing to work 14 thousand hours/week but employers are only willing to accept 6 thousand hours/week. There is a surplus of 8 thousand hours/week. Price Floor: Minimum Wage Law

Organs and Freeways Shortage of organs (kidneys, etc.) Congestion on freeways

Thank you for your time!

Consensus Among Economists Rent control, minimum wage, tariffs, etc.

Which Variable is Dependent? Quantity depends on price but price also depends on quantity. The more scarce the material, the higher the price (e.g. gold versus iron ore) Supply: The larger the quantity supplied, the higher the price. More materials must be bid away from their other uses to supply the product. This gets increasingly more expensive (e.g. oil production, health care).

Law of Supply When excessive profits are available, new competitors will enter the market. This new competition increases supply and lowers the price. New and existing competitors will continue to increase their output until there are no more excessive profits to be made in that industry.

Law of Demand When the price is high, consumers restrict their consumption. When faced with high rents, people will chose to share apartments, rent smaller apartments, rent rooms instead of apartments, move out of the area, buy their own houses, etc. To sum it up, the cure for high prices is high prices.

Without Rent Control, Who Protects the Renter?

Competition from other landlords.

Without Rent Control, Who Protects the Renter? Competition from other landlords. When prices (and profits) of landlords are high, new landlords will enter the market. With increased supply, the price will fall.

What Can Be Done? "The bulk of the evidence marshaled in this paper suggests that zoning, and other land-use controls, are more responsible for high prices where we see them.... Measures of zoning strictness are highly correlated with high prices. Although all of our evidence is suggestive, not definitive, it seems to suggest that this form of government regulation is responsible for high housing costs where they exist…if policy advocates are interested in reducing housing costs, they would do well to start with zoning reform.“ -Glaeser, Edward L. (Harvard) and Joseph Gyourko (Wharton). "The Impact of Building Restrictions on Housing Affordability." FRBNY Economic Policy Review / June Page 35