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OU ECON 1113 - Price Controls, Total Revenue and Total Expenditure, and Elasticity

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ECON 1113 1nd Edition Lecture 5 Outline of Last Lecture I. Competitive Price DeterminationA. DemandB. SupplyC. EquilibriumII. Legal Price ControlsA. Legal Price CeilingsB. Legal Price FloorsIII. Changes in Demand and/or Changes in SupplyOutline of Current Lecture I. Price Controls: Case StudiesA. Ticket ScalpingB. Farm Price SupportsII. Changes in Demand and Supply: The General CasesIII. Concept of Total Revenue and Total ExpenditureIV. Concept of ElasticityCurrent LectureI. Price Controls: Case StudiesA. Ticket Scalping at the Super Bowl1. Example of a Price Ceiling: legal price above which transactions cannot occur2. Just because the face price of a ticket is set at $150 does not make this value relevant to the market3. The price equilibrium, or market price, of the ticket may cost $8004. 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 them5. Thus, individuals then begin to sell there tickets at a value closer to equilibrium, $800, although this is illegalB. Farm Price Supports for Farm ProductsThese 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.1. Example of a Price Floor: legal price below which transaction cannot occur2. Legislated in 1938, causing constant surplus in the economy3. 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 sold4. This results in excess supply, or surplus, because the equilibrium price, or market price, occurs below the support prices for the substances5. Suppliers produce more than buyers demand at such high pricesC. Both of these examples exhibit paralysis of the “Invisible Hand”II. Concept of Total Revenue (TR) and Total Expenditures (TE)A. TR = TEB. It is the price/unit (P) multiplied by the number of units (Q)C. TR = P x Q = TED. Example1. $5/book x 100 books = $500III. Changes in Demand and Supply: The General CasesA. An Increase in Demand1. Graphically, this is a shift to the right for the demand curve2. It implies a price increase and a quantity increase due to the causes listed in the previous lecture3. If price and quantity increase, this means that P and Q increase; therefore, TR and TE also increaseB. An Increase in Supply1. Graphically, this is also a shift to the right for the supply curve2. It implies a price decrease and a supply increase due to the causes discussed in the previous lecture3. If price decreases and quantity increases, this means that P decreases andQ increases; however, this is ambiguous and unhelpful in telling the behavior of TR and TEIV. Concept of ElasticityA. A measure of how responsive people are to changes in their economic circumstancesB. Price Elasticity of Demand (ED): a measure of how responsive people are to a change in price, ceteris paribus, in their buying power1. ED = percentage change in quantity demanded divided by percentage change in price2. ED = |% ∆ Qd% ∆ P|C. Three Possibilities1. ED > 1a. Implies that % ∆Qd>% ∆ Pb. Examplei.% ∆ P=+2 %ii.% ∆Qd=−4 %iii.|% ∆ Qd>% ∆ P|c. Elastic Demand2. ED < 1a. Implies that % ∆Qd<% ∆ Pb. Examplei.% ∆ P=+2 %ii.% ∆Qd=− 1 %iii.|% ∆ Qd<% ∆ P|c. Inelastic (unresponsive) Demand3. ED = 1a. Implies that % ∆Qd=% ∆ Pb. Examplei.% ∆ P=+2 %ii.% ∆Qd=−2 %iii.|% ∆ Qd=% ∆ P|c. Unitary DemandD. If the demand curve is a vertical line, it is referred to as perfectly inelastic demand, ED = 01. Example: life-saving surgeries/day2. No matter how high the price rises, the demand will remain the sameE. If the demand curve is a horizontal line, it is referred to as perfectly inelastic demand, ED = infinity1. Example: demand schedule facing an individual competitive firm, such as individual wheat farmers2. If the individual sets the price even a few cents too high, no one will buy the product3. 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


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OU ECON 1113 - Price Controls, Total Revenue and Total Expenditure, and Elasticity

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