Transcript Putting Supply & Demand Together

Putting Supply & Demand
Together
Distortions to the
Supply & Demand Model:
Price Controls
ECO 284 - Foster
Putting Supply & Demand Together:
The Market for Cameras
Price
Supply
What is the
equilibrium
price and
quantity?
What happens at
P=$70?
$70
$50
$25
Demand
What happens at
P=$25?
Quantity
30 35
80
115
150
The Market for Cameras
What does the area under Demand represent?
Price
$80
Area = Total consumer value
$79.99
$78.59
$72.99
$70.99
$75.99
= $50*(80) + (.5)*($30)*(80)
= $4000 + $1200
=
$5,200
But, consumers paid . . . $4,000; so
$50
Consumer Surplus = $1,200
Demand
Quantity
80
The Market for Cameras
What does the area under Supply represent?
Price
Supply
$50
Why does it take a higher price to
induce producers to increase the
quantity supplied?
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 = $4000 - $2,400
$10
Quantity
80
= $1,600
What is so good about markets?
Price
Freely functioning
markets tend to
maximize the
consumer and
producer surplus.
Consumer
Surplus
Supply
The Market
for Cameras
$50
They maximize
the value we get
from our limited
resources.
Producer
Surplus
Demand
Quantity
80
Markets are an efficient mechanism in determining “What to produce?”
Distortions to the Supply & Demand Model:
Price Controls – Price Ceilings
Price
Supply
A price ceiling is a
maximum (legal)
price.
Pe
To be “effective” it
must be set below Pe
P*
Demand
What problem does
this cause?
How is it resolved?
Quantity
QS
Qe
QD
Price Controls – Price Ceilings
Price
Supply
Lost surplus means
lost value.
Consumer
payments may rise
to well above Pe.
Sellers have
incentives to
charge &
consumers have an
incentive to pay.
Pe
P*
Demand
Quantity
QS
Qe
QD
Price Controls – Price Floors
Price
Supply
A price floor is a
minimum (legal)
price.
P*
Pe
To be “effective” it
must be set above Pe
Demand
What problem does
this cause?
How is it resolved?
Quantity
QD
Qe
QS
Price Controls – Price Floors
Price
Supply
Lost surplus means lost
value.
Example: Butter.
P*
Pe
It gets worse …
Government buys surplus
And, it gets even worse …
Government stores surplus
Demand
Quantity
QD
Qe
QS
Resources produce goods that we can’t have; we consume less; inefficient.
Price Controls – Price Floors
Price
Supply
Example: Min. wage.
P*
Gov’t doesn’t buy
excess.
Pe
Violators are fined.
Demand
Must a minimum wage result
in a surplus of unsold labor?
Quantity
Yes, if it is an effective price
floor, it must.
QD
Qe
QS
Supply & Demand Problems
#1. In the market for oranges, what will happen if
there is great weather in Florida and California?
Price
Supply
Pe
Demand
Quantity
Qe
Supply & Demand Problems
#1. In the market for oranges, what will happen if
there is great weather in Florida and California?
Price
Supply increases;
price falls; output rises
Supply
New Supply
Pe
New Price
Demand
Quantity
QeNew
Quantity
Putting Supply & Demand
Together
Distortions to the
Supply & Demand Model:
Price Controls
ECO 284 - Foster
Distortions to the Supply & Demand Model:
Price Controls