Transcript Price Ceiling - VesperEconomics

Market Efficiency
vs.
Efficiency Loss
Market Efficiency Basics
• Consumer surplus
– The amount a consumer is willing to pay for a
good minus what he actually pays for it.
Cookie Monster may be willing
to pay $100 for one cookie.
But, Cookie Monster is happy to
find out that the price of a
cookie is just $1.
So Cookie Monster’s consumer
surplus per cookie is $99!
Market Efficiency Basics
• Producer surplus
– The amount a seller sold the item for minus what
they were willing to sell it for
Best Buy is willing to sell a
television as low as $500
A customer buys that same
television for $600
Best Buy had a producer surplus
of $100
Market Efficient Basics
• Total surplus
– consumer surplus + producer surplus
• So, when do you think a market is most
efficient…?
When total surplus is maximized!
Measuring surplus on a graph
• Consumer surplus
– The area below the demand curve and above the
price
• Producer surplus
– The area above the supply curve and below the
price
Consumer and Producer Surplus in the Market Equilibrium
Price
A
D
Total
Surplus
Can you label:
-Consumer surplus
- Producer surplus
- Total surplus
Consumer
surplus
Equilibrium
price
Supply
E
Producer
surplus
B
Demand
C
0
Equilibrium
quantity
Quantity
Efficiency Loss
• Also known as deadweight loss or welfare
loss
• Total surplus is NOT maximized
• Resources and products are underutilized
• Many causes
– Government Regulations
– Externalities
– Monopoly pricing
Government Regulation
What do you think is the market price
for renting an apartment in Plainfield?
• What happens to the quantity of demand and
supply after the price change?
• List four outcomes that would most likely
occur if the price was set there
– Think like an economist!
Price Ceiling
• Maximum price that can be legally charged for
a good or service
• It’s called “binding” if the ceiling price is set
below market equilibrium
– It’s “not binding” if it’s set above market
equilibrium
Rent Control (Price ceiling)
• Allows people to live in neighborhoods they
could not afford
• Causes a shortage of apartments
• Causes bad quality apartments
• Property value in surrounding area’s can
decline
• Causes deadweight loss!
What do you think the average wage is
for a cashier at a Plainfield Meijer?
• What happens to the quantity of demand and
supply after the wage change?
• List four outcomes that would most likely
occur if the price was set there
– Think like an economist!
Price Floors
• Minimum price that is set that must be paid
for a good or service
• It is called “binding” if the floor price is set
above market equilibrium
– It’s “not binding” if it’s set below market
equilibrium
Minimum Wage (price floor)
• Minimum price that an employer can pay a
worker for an hour of labor
• Increases worker’s income
• Can cause a surplus of workers
• Younger people may not be hired for low
skilled jobs
• Many, many, many more outcomes
National & Illinois Minimum Wage
• National = $7.25
• Illinois = $8.25
• Is that enough or even needed?
UTILITY
not
We are
talking about
us!
Market Efficiency Basics
What do you think happens to the utility
of this good after you consume more
• Utility
– The amountand
of satisfaction
more of or
it?benefits one gets
out of consuming a good.
Market Efficiency Basics
• Diminishing marginal utility
– There will be a decline in utility with each
additional unit consumed
Holy pizza! My utility
from each slice of pizza
really started to
decline….think I’ll just
order a small pizza next
time.
Market Efficiency Basics
• Utility maximization rule
– Maximize your utility with each dollar you spend
– You do this by weighing your marginal utility per
dollar spent
$1 Slice of Pizza Total Utility
Marginal Utility
1
100
100
2
220
120
3
350
130
4
450
100
5
490
40
6
491
1