Economics 1: Principles of microeconomicsMonday, April 30, 2012Lecture 8 Review:-Equilibrium Price (Market Clearing Price)Signals and incentives $ GasolineS 4.50D Q^S Q^* Q*Drop out uses that are more than $4.00 but less than $4.50 and keep the ones that matter to you the mostExample: Parents far away and haven't seen you in months ask you to drive down and visit and you say no, but your significant other is only an hour away and asks to see you when it has only been three days and yes say YES!Preview:-Price ceilings- Definition- How it changes the market's incentives- How it shifts competition- InefficienciesPrice Ceiling: A legally set maximum price an item we think is priced too high inaccessible to people with modest means to be effective, the price ceiling has to be set below P*4.00Economics 1: Principles of microeconomicsMonday, April 30, 2012Lecture 8 $ S4.50 QD increases, QS decreases -Competition on producer's side4.00 A price ceiling set above P* has no effectPrice ceiling > Market clearing priceD INEFFECTIVE PRICE CEILING Not be able to buy gas for more than $3.50 A L SBDC QS Q*4.003.504.003.50MConsumer Surplus: A, B, 4.00Producer Surplus: B, C, 4.00New CS: A, L, M, 3.50Save $0.50/gallonNew PS: C, M, 3.50Lost moneyLoss of net gain: L, B, M -Dead weight lossGood news: Gas is cheaper for $3.50Bad news: cannot find anyEconomics 1: Principles of microeconomicsMonday, April 30, 2012Lecture 8 4.25 QS QD |--SHORTAGE--|Rent control: how much you pay for an apartment 1 40When there is a shortage, competition moves into a different arena4.003.50Change form of competition, not eliminate the competitionConsumers willing to pay 4.25, which is 0.75 more than pump price2,0001,50040 applications for 1 apartmentIn control of the supplier's hands now...How to choose? And why choose that one specific couple if they were the second applicant--> First come, first serve--> Personal characteristics -owner's daughter's birthday was on the same day as the wedding dateEconomics 1: Principles of microeconomicsMonday, April 30, 2012Lecture 8 Inefficiencies:1. Shortage2. Reduction in quality3. Search costs --> divert a lot of resources towards something else you are searching for4. Dead weight loss5. Misallocation of resources6. Multiple layers of regulationa. Ways landlords discriminateb. Ability of landlords to reduce the QSLandlords have to discriminate against 39 other people out of the 40 applicants for only 1 apartment.-> Always find ways to knock out competitionAbility of landlords to reduce QS-> make regulationsPrice Floors: A legal set of minimum prices to be effective, the price floor has to be set above P* sellers would want price floors set above market clearing price Cannot hire someone for less than 8.00/hourQ*D Q* Q*S |-----SURPLUS-----| OR
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