ECON 1113 1nd Edition Lecture 5 Outline of Last Lecture I Competitive Price Determination A Demand B Supply C Equilibrium II Legal Price Controls A Legal Price Ceilings B Legal Price Floors III Changes in Demand and or Changes in Supply Outline of Current Lecture I Price Controls Case Studies A Ticket Scalping B Farm Price Supports II Changes in Demand and Supply The General Cases III Concept of Total Revenue and Total Expenditure IV Concept of Elasticity Current Lecture I Price Controls Case Studies A Ticket Scalping at the Super Bowl 1 Example of a Price Ceiling legal price above which transactions cannot occur 2 Just because the face price of a ticket is set at 150 does not make this value relevant to the market 3 The price equilibrium or market price of the ticket may cost 800 4 In this situation there are also a fixed number of seats 80 000 and at this price ceiling value price of 150 an excess demand or shortage emerges because the demand for the tickets at such a low cost encourages more people to buy them 5 Thus individuals then begin to sell there tickets at a value closer to equilibrium 800 although this is illegal B Farm Price Supports for Farm Products 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 II III IV 1 Example of a Price Floor legal price below which transaction cannot occur 2 Legislated in 1938 causing constant surplus in the economy 3 The government has instituted a price floor on agricultural products that places a price floor on the minimum value for which these crops can be sold 4 This results in excess supply or surplus because the equilibrium price or market price occurs below the support prices for the substances 5 Suppliers produce more than buyers demand at such high prices C Both of these examples exhibit paralysis of the Invisible Hand Concept of Total Revenue TR and Total Expenditures TE A TR TE B It is the price unit P multiplied by the number of units Q C TR P x Q TE D Example 1 5 book x 100 books 500 Changes in Demand and Supply The General Cases A An Increase in Demand 1 Graphically this is a shift to the right for the demand curve 2 It implies a price increase and a quantity increase due to the causes listed in the previous lecture 3 If price and quantity increase this means that P and Q increase therefore TR and TE also increase B An Increase in Supply 1 Graphically this is also a shift to the right for the supply curve 2 It implies a price decrease and a supply increase due to the causes discussed in the previous lecture 3 If price decreases and quantity increases this means that P decreases and Q increases however this is ambiguous and unhelpful in telling the behavior of TR and TE Concept of Elasticity A A measure of how responsive people are to changes in their economic circumstances B Price Elasticity of Demand ED a measure of how responsive people are to a change in price ceteris paribus in their buying power 1 ED percentage change in quantity demanded divided by percentage change in price Qd 2 ED P C Three Possibilities 1 ED 1 a Implies that Q d P b Example P 2 i Q d 4 ii iii Qd P c Elastic Demand 2 ED 1 a Implies that Q d P b Example P 2 i Q d 1 ii iii Qd P c Inelastic unresponsive Demand 3 ED 1 a Implies that Q d P b Example P 2 i Q d 2 ii iii Qd P c Unitary Demand D If the demand curve is a vertical line it is referred to as perfectly inelastic demand ED 0 1 Example life saving surgeries day 2 No matter how high the price rises the demand will remain the same E If the demand curve is a horizontal line it is referred to as perfectly inelastic demand ED infinity 1 Example demand schedule facing an individual competitive firm such as individual wheat farmers 2 If the individual sets the price even a few cents too high no one will buy the product 3 Alternately if the individual sets the price too low he will not be maximizing his own profit because he can sell his entire quantity for more