ECON 221 Lecture 8 Outline of Last Lecture I. Efficiency remindersII. Government interventionIII. WagesIV. Price Control Outline of Current Lecture I. Supply and demand model applicationII. Quantity controlsIII. Tradea. International tradeb. Gains from tradeIV. Price ControlsV. Government interventionCurrent LectureI. Applying the S&D model to things a. Using the S&D model to understand the impact of government intervention.b. Using the S&D model to understand the domestic impact of international trade. II. Quantity controlsa. Government might use “quotas” to control the quantity of a good that is bought and sold. Ex. Requiring a license to operateb. Establish a maximum that can be soldi. Taxi Cabs – New York taxi cab drivers have to have a medallion to operate and the city limits the number of medallions availableii. Fishing Quotas – Concern that tuna would go extinct if fishing had 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.continued at the same rate, so maximum allowable amount is setc. Only meaningful when quota quantity is less than equilibrium quantityIII. Summary of quantity controlsa. Government might want to intervene, controlling prices or quantitiesb. Trade off between efficiency and equity in marketsc. All of the interventions lead to a loss of a total surplus (“deadweight loss”)i.Price ceilings -> shortagesii.Price floors -> surplusesIV. Tradea. Introducing international tradeb. There are gains from tradei.Meaning – We can both be better off by trading, than withoutii.How does it work? – Produce the thin you’re “better at”c. Model to demonstrate gains from tradei.“Production Possibilities Frontier”ii.Two goods, two producersd. Gains from tradei.Adam Smith’s Wealth of Nationsii.We can do better (consume more) by trading with others than by producing everything ourselves iii.However, what if one party is more productive at everything? Is trade worthwhile? 1. US has a very large economy that could very productive in many domains.2. Why not produce necessary textiles within the country? Wouldn’t this be more efficient? iv. David Ricardo – 18171. Pointed out gains from trade for both parties, even if one is more productive.2. Comparative productivity matters more than absolute productivitye. Production possibilities frontieri.Points along PPF are feasible and efficient 1. Possible to produce those combinations of goods2. Fully uses available resourcesii.Points below the PPF are feasible but inefficient – does not fully use resourcesiii.Points above PPF are not feasible – not possible to produce with given resources iv.PPF’s demonstrate the importance of opportunity costs in production decisions v.Along the PPF you can’t produce more of one good without producing less of the other good. vi.Thus, the PPF illustrates the trade-off between producing two goods. vii.When PPF is straight line, opportunity cost of producing a good on the x-axis is just the slope of the line.viii.Opportunity cost of producing a good on the y-axis is just the reciprocal of the slope.f. Trade definitions i.Absolute Advantage – Producer has an AA in a good if they produce the most of it (if they spend all of their time producing that good)ii. Comparative Advantage – Producer has a CA in a good if they have the lowest OC of producing it (they give up the least to produce the good).V. Government might want to intervene, controlling price or quantitiesa. Trade off between efficiency and equity b. Tariffs – tax on imported goods i.If foreign sellers have to pay tax on each unit they sell, they will raise the price they charge (domestic) consumers to account for the tax (similar to regular taxes) VI. Why would a government intervenea. National securityb. Job creationc. Infant industryd. Because producers stand to gain and consumers won’t