Econ 202 1st Edition Lecture 8 Outline of Last Lecture I. What a competitive market is and how it is described by the supply and demand modelII. What the demand curve and supply curve areIII. The difference between movements along a curve and shifts of a curveIV. How the supply and demand curve determine a market’s equilibrium price and equilibrium quantityV. In the case of a shortage or surplus, how price moves the market back to equilibriumOutline of Current Lecture I. The meaning of price controls and quantity controls, two kinds of government interventions in marketsII. How price and quantity controls create problems and can make a market inefficientIII. Why the predictable side effects of intervention in markets often lead economists to be skeptical of its usefulnessIV. Who benefits and who loses from market interventions, and why they are used despite their well-known problemsCurrent LectureInterference in markets has consequencesI. Price controlsa. Price controls: legal restrictions on how high or low a market price may go. There are two main types:b. Price ceiling: a maximum price sellers are allowed to charge for a good or service(usually set BELOW equilibrium).c. Price floor: a minimum price buyers are required to pay for a good or service(usually set ABOVE equilibrium).II. How Price Ceilings Cause Inefficiency a. Price ceilings cause predictable side effects:i. Inefficiently low quantityThese 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. Inefficient allocation to customersiii. Wasted resourcesiv. Inefficiently low qualityv. Black marketsIII. Inefficiently Low Quantitya. When prices are held below the market price, shortages are created.b. The lower the controlled price relative to the market equilibrium price, the larger the shortage.IV. Inefficient Allocation to Customersa. Price controls distort signals that would help the goods get allocated their highest-valueduses. b. Consumers who value a good most don’t necessarily get it. So producers have no incentive to supply the good to the “right” people first.i. As a result, goods are misallocated.V. Wasted Resourcesa. Price controls that create shortages lead to bribery and wasteful lines.b. Shortages: not all buyers will be able to purchase the good.c. Normally, buyers would compete with each other by offering a higher price.d. If price is not allowed to rise, buyers must compete in other ways (waiting in line, illegal bribes and favors).VI. Inefficiently Low Qualitya. At the controlled price, sellers have more customers than goods.b. In a free market, this would be an opportunity to profit by raising prices.i. But when prices are controlled, sellers cannot.ii. Sellers respond to this problem in two ways:1. Reduce quality2. Reduce