ECON 110Lecture 10Outline of Last Lecture I. Clicker ReviewII. Cross price elasticity: How the change in price of one good affects the demand for another good.III. Clicker Question: Elasticity of supply a. An application: cable car storyb. Another Application: Can good news for farming be bad news for farmers?IV. Revisiting market equilibriumV. eBay and consumer surplusOutline of Current Lecture I. Chapter 7 Continueda. Clicker review: Producer surplusb. Review of Consumer Surplusc. eBay and Producer SurplusII. Chapter 6: Demand and Supply Applicationsa. Groups with other motiveb. Government regulation – Price Controli. Price Ceilingii. Price FloorCurrent Lecture – Demand and Supply Applications: Price ControlsClicker question: Consider the keyboard market shown in the diagram below. What is the amount of the producer surplus when we are at equilibrium price? Demand: From ( 0 , 250 ) to ( 240 , 0 )Supply: From ( 0 , 25 ) to ( 270 , 250 )Equilibrium point: ( 120 , 125 )X axis is Quantity (in millions of keyboards,) and Y axis is Price (in Dollars per keyboard)A. $12000B. $24000These 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.C. $6000D. $125Answer: C. $6000The producer surplus will be the area of the triangle between the equilibrium price line, and the supply curve. Area of a triangle equals one half of the base time the height. Base = 120 – 0 = 120Height = 125 – 25 = 100Base X Height = 12000Divide by 2 = $6000Consumer Surplus Consumer Surplus is the difference between a consumer’s willingness to pay for a product and the market price of the product. On a graph, Consumer Surplus is represented by the area beneath the demand curve and above the market price. Essentially, this is the benefit that buyers receive from a goodas perceived by the buyersProducer Surplus Producer Surplus is the area between the supply curve and the market price. This represents the difference between what a producer is willing to sell a product for, and the market price. Essentially, this is the benefit that producers receive from selling a good, as perceived by the producers.Total surplus is consumer surplus plus producer surplus, or value of a product to consumers minus the cost of the product for suppliers.Chapter 6 : Demand and Supply Applications (the effect of government policies on markets.)Another concept to consider in terms of resource distribution is equity. The equilibrium market exemplifies equally distributed goods and revenue. However, this is often not how it works out, especially since certain groups believe the resources should be distributed unevenly. As a result, the government often influences prices to achieve those goals; this is termed Price Control.Price control has two forms: Price Ceilings and Price Floors. Price ceilings are a legal maximum price. The impact of a price ceiling depends upon where it is relative to the market price and equilibrium price. If it is set below the equilibrium price, it will alter the number of units made available and traded (this has a binding effect.) Overall, this will cause buyers toincrease quantity demanded, while supply will go down, and the result is a shortage. As a result of the shortage, some people will be unable to obtain the good. The overall market price will most likely rise. Some people blame policies like this for poverty. Note: This effect is different from scarcity. It is not a lack of resources that causes the shortage, but price control. For an example, take a look at rent control in New York City, which has been in place since WWII.Some people claim this causes deliberate deterioration of rental housing, as well as conversion of rental housing to owner-occupied housing. The effect of this is that it creates winners and losers, and is a source of homelessness in NYC.Price FloorsPrice Floors are a minimum legal price. This concept will be discussed further in the next