ECON 251 1st Edition Lecture 8 Outline of Last Lecture I. TermsII. Allocative EfficiencyIII. ConsumerIV. SurplusV. Producer SurplusVI. Deadweight LossVII. EquityOutline of Current Lecture I. TermsII. Options for FairnessIII. Price ControlsIV. Rent ControlV. Price FloorsCurrent LectureI. TermsUtilitarianism: the goal to achieve the greatest happiness for the greatest number of peopleMaximum Principle: making the poorest person as well off as possiblePrice Ceilings: maximum legal price (Pc)Price Floors: minimum legal price (Pf)Dl: demand for labor = firmsSl: supply of labor = householdsQs: quantity suppliedQd: quantity of demandedII. Options for Fairness1. Utilitarianism- We have to assume that people with more money value an additional dollar less than people with less moneyExample: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.MB $1 = the value of an additional dollar (units of “happiness”)John has an income of $90,000MB of $1 = 5Sara has an income of $60,000MB of $1 = 9If you transfer $1 from John to Sara, John loses 5 units of “happiness”, but Sara gains 9 units of “happiness”. So the total increase is 4 units of “happiness”.2. Maximum Principle- Once the poorest person moves up, another person replaces them, and the cycle continues.III. Price ControlsPrice Ceiling (highest price that can be legally charged)Example: rent control, usury law, salary caps, utilitiesPrice Floor (lowest price at which a good can be sold)Example: minimum wage, agricultural price supportsIV. Rent ControlExample:D for apts: Qd = -2P +2000 (P = -1/2Qd + 100)S for apts: Qs = P – 400 (P = Qs + 400)Qs = QdP* = $800Q* = $400Pc = $600Has to be set below the equilibrium to have an effect because the market naturally moves to equilibrium.Qd > Qs = shortage of 600 apts (Qd – Qs)Who gets the apartments? Ways to get an apartment:1. Linesa. Cost of waiting = value of time2. Circumvention (ways around the rules)a. Bribesb. “key money”3. Ration couponsa. Usually government issued during shortages due to wars, etc.4. Violence5. DiscriminationV. Price FloorsExample: Minimum WagePf must be above the equilibrium to have an effect.Qs > Qd = surplus = unemployement20,000 people now making $0 ($100,000 – $80,000).- But firms fire their least productive employees first (usually teenagers fall into this group)- This group (the teenagers) is hurt by the price floor, but instead of 100,000 people making $6, 80,000 are making