Econ 1202 1st Edition Lecture 8 Outline of Lecture 6 (Supply and Demand Principles (continued))I. Supplya. Supply Curveb. Shifts in SupplyII. Demand and Supply “Mechanics”III. Increase/Decrease in Demand (no change in supply)IV. Increase/Decrease in Supply (no change in demand)V. Demand and Supply Change SimultaneouslyOutline of Lecture 7 (Gains From Trade Revisited/ Price Controls)I. Consumer SurplusII. Producer SurplusIII. Economic SurplusIV. Competitive Markets, Marginalist Paradigm, and OptimalityV. What happens when we aren’t producing at the efficient level?VI. Price CeilingsVII. Price FloorsVIII. What is one critical function the prices reform?Gains From Trade RevisitedI. Consumer Surplusa. A Consumer Surplus is the difference between the maximum, or highest, price a consumer is willing to pay (for a good or service) and the amount actually paid for that good or service. i. Example: Buying clothes on sale instead of paying full priceII. Producer Surplusa. A Producer Surplus is the difference between the minimum, or lowest, price a seller is willing to accept (to supply a good or service) and the amount actually received for that good or service.i. Example: Selling something on EBay for a higher price than originally listed for III. Economic Surplusa. An Economic Surplus is equal to the consumer surplus and the producer surplusSConsumer SurplusPriceDeadweight LossProducer SurplusPeDQuantityQeIV. Competitive Markets, Marginalist Paradigm, and Optimalitya. Gains from trade are greatest at Pe and Qei. You can’t pick a better Q than the Qe when talking about economic surplusii. At Qe, the MB (of production) equals the MC (of production)b. Optimalityi. Only at the market clearing price is when the MB=MCii. We can’t improve our situation by producing more or lessV. What happens when we aren’t producing at the efficient level?a. This results in economic loss, which is known as deadweight loss.i. Deadweight Loss is the loss of gains from tradePrice ControlsVI. Price Ceilingsa. A Price Ceiling is a legal maximum on the price at which a good can be soldi. Initiated when the market price is too highii. For it to be binding then: max P<Peiii. 5 Important Effects:1. Shortages2. Reduction in production quality3. Goods still must be rationed (waiting lists, black markets)4. Deadweights losses (loss of gains from trade)5. Misallocation of resourcesiv. Example: Rent ControlVII. Price Floorsa. A Price Floor is a legal minimum on the price at which a good can be soldi. Initiated when the market price is too lowii. For it to be binding then: min P>Peiii. 4 Important Effects:1. Surplus2. Wasteful increases in product quality3. Deadweight losses (loss of gains from trade)4. Misallocation of resourcesSPricePriceSPrice CeilingPePrice CeilingPeDDShortageQuantityQeQuantityiv. Example: Minimum WageVIII. What is one critical economic function the prices reform?a. Prices are signals wrapped in an incentivei. Suppress PricesSuppressed SignalsSuppressed Incentivesb. Price controls seek to solve the economic problem by suppressing the symptom of the problem and don’t address the cause of the problem. SurplusSPricePricePrice FloorSPe PePrice