ECON 202 1nd Edition Lecture 13 Outline of Last Lecture I. Elasticitya. Price Elasticity of Supplyi. Elasticity of Labor SupplyII. Price Controlsa. Ceilings and Floorsb. Minimum Wage ModelIII. No Class on the 17thOutline of Current Lecture IV. Price Controlsa. Ceilings and FloorsV. Efficiency of Marketsa. Consumer SurplusCurrent LecturePrice ControlsPrice Ceiling – an artificially imposed maximum price above which price is not permitted to riseThis situation creates a shortage. Some consumers are “better – off” but manyconsumers are left wanting of a good. Sellers are also not “better – off”Price Floor – an artificially imposed minimum price below whichprice is not permitted to fallThis situation creates a surplus. Some suppliers are “better – off” butmany have lost customers and are left with excess goods.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. PriceQuantitySDP*PCQCSQ*QCDPriceQuantitySDP*PFQFDQ*QFSMinimum Wage Model – low skilled labor marketIf minimum wage is above the equilibrium price it raisesunemploymentA wage ceiling burden employers with fixing thesocioeconomic problem of low-income families (incomeversus expenses)Earned Income Tax Credit – easier to identify low income familiesand may do a better job helping them specifically then raising theminimum wageIf minimum wage is raised large companies such a McDonaldsprobably wont fire employees, but will slow down their hiringpracticesCongressional Budget Study assumed that the elasticity of labor demand was about - 0.09, however some economic researchers believe it to be closer to -0.12, which will have a greater impact on the demand for labor if minimum wage is raised.Efficiency of MarketsConsumer Surplus – measures the benefit a consumer receives from participating in a market- Another way to interpret a demand curve is as a “maximum willingness to pay” curve or a “marginal benefit” curveExample: Suppose you have 3 buyersConsumer Surplus (CS) A is $5- $2.50 so CS=$2.50B is $3- $2.50 so CS=$0.50C will not buyWageHours of LaborSDW*$7.25L’L*L’’D123$5$3$2ABCPrice=$2.50PriceQuantityDemandBuyer Marginal BenefitA $5B $3C $2CS is the difference between the maximum amount a buyer is willing to pay and the market price of a good.CS can be found geometrically by finding the area under the curve and above the market priceExample from above: Area = length * width so;Area = (5-2.5) * 1Area = $2.50Example: Car SaleHighest price a buyer is willing to pay = $30,000; the seller wants to know this numberLowest price a seller is willing to sell = $20,000; the buyer wants to know this numberIf the price $26,000 was agreed upon, then the consumer surplus would be:$30,000 - $26,000 = $4000.In general CS can be computed as:The area under the demand curve and above the price Example:The shaded area is the Consumer Surplus and itcan be computed as follows:Area = ½ * base * hightA = ½ * 1000 units * ($40 - $10)A = 500 units * $30A = $15,000 = Consumer SurplusChanges in Consumer Surplus “all other thingsequal”1. Changes in price: If price increases thenconsumer surplus decreases and vice versa2. Changes in demand: if quantity demanded increases then consumer surplus increases and vice
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