Like, have that as a
barrier to not come and get help for
any of the concepts. I just got to
make sure this is recording. This
is an important one to get
recorded. Should do it automatically,
hopefully. All right,
great. So, I just want to jump
back a little bit to the consumer
surplus size. So, we talked about what consumer surplus means. It's how much an
individual is willing to pay for something,
minus how much they actually pay. you might
value something at ten dollars so you'd be
willing to pay up to ten dollars for it so
that could be you yeah this is ten dollars up
to ten but if you're only paying whatever
this is p0 this like blue line here would
be your consumer surplus and once we add
up all the consumers together that's how
we get the consumer surplus however when we're
curating the questions for the assignment
they also ask you to calculate the
consumer surplus and I haven't taught you how
to do that so i wanted to go back and teach
you how to do that so graphically this is
just the area of a triangle which is the
length times the width divided by two and the
way we do that is the quantity which is
our our width so the quantity of um the
product and the the price times the price which
is our length so from this point to here
divided by two so that's just how we get the the
area or the consumer surplus so for example
if the maximum price the intercept of the
demand curve is $20 the price of equilibrium
is $12 and the quantity and equilibrium is
25 then we're gonna have 25 which is the
the quantity equilibrium times 20 minus 12 so
this would be 20 here this would be 12 here
so 20 minus 12 gives us the length divided
by 2 and we get 100 very simple that's how
we just calculate the consumer surplus so yeah
and then we finished up last class talking
about the supply curve we created our own
supply curve of labor that supply of labor is
the same as supplying any good and the way
you should think about it is any firm will
be willing to supply it produce and supply a
good if their marginal cost is below the
price or equal to or below the price um if
you're on zoom can you just make sure you um
mute yourselves thank you very much everyone
controls um great so um where was i yeah so
for example if it's at seven dollars and the
firm's marginal cost is is five dollars
they're going to produce at seven dollars and
i'll produce as much as they can up until their
marginal cost hits seven dollars so our
total supply curve just says at that price
point all together how much a firm is willing
to supply and you can think about that in
our Vegemite game when the price was a hundred
dollars like everyone in the room was willing
to stand up once we had it down to like
50 cents down here we still had quite a lot
of people standing up but only like six or so
so as price increases people are more willing
to supply so I've done this already
so similar to demand there's a number of
different factors that can affect our supply curve
so it can be represented like this our quantity
supplied is some function to do with
the price of good x the price of good z or an
index of other goods the like inputs wages
and other things and other variables there's
a whole bunch of things that can affect
supply and similar to demand there's two ways
supply can change if it's the price alone
that changes if one day all of a sudden
instead of it being five dollars for a banana
it's seven dollars for a banana we're gonna
have an increase in supply from five
dollars to seven dollars but it's going to be
a movement along the supply curve so when it's
a price change whether it's demand or supply
it moves along the supply curve to get
our changing quantity whereas on the other
hand there are a lot of other factors that
can affect the supply of a product however
if it's anything other than price that changes
the quantity supplied we represent this
with a shift of the entire supply curve so
something that increases supply will move our
supply curve from s0 down and to the right
to s2 so you can see here at a the price
here at the same price there's going to be
more supplied whereas if there's a decrease in
supply it moves up and to the left and at
the same price where where a originally is
there'll be less amount supply to the same price
so we'll talk about some examples but an
easy example to think about is if the cost
of inputs decrease then let's say originally
it cost you three dollars to produce a
product you're willing to sell it at three
dollars but now it only costs 290 so you'd be
willing to sell that at 290 and produce an
extra good which might cost 293 and sell that
at three dollars so you're willing to
produce more at the same price if your inputs
are cheaper hence why now here there's more
quantity at the same price that's kind of
the intuition behind it so similar to the
demand curve we have a number of different
reasons why the supply curve can shift
so i kind of just mentioned before input
prices technology or government regulations
being added or remove the number of firms
substitutes in production taxes and
producer expectations producer expectations
i don't actually have a slide on that it's
the exact same as consumer expectations
if you think you know something is going to be
more expensive now than then in the future
or the price will be high now you'll produce
more now and vice versa so it's the same
sort of idea so let's look at input prices as
project as production costs increase each
unit the product is now more expensive to
create so originally something cost three
dollars to create now it costs three dollars
ten you're not going to produce that unit
sell at three dollars anymore you make a loss
of ten cents now as a result this means the
minimum amount of money you're willing to
accept for each unit increases or decreases
depending on what happens to the production
cost and this is going to shift the supply
curve up and to the left so as your input
cross increase you're going to supply less
at the same price point so we're going to move
up and to the left and vice versa if they
decrease so technology or government regulations
can also affect this in a similar way
so government policies can affect the cost of
production same with tech and a key example
which is kind of a hot topic in in economics
at the moment and in in american politics
is is free trade and tariffs so nafta the
north american free trade agreement was a
free trade agreement between mexico canada
and the us they have essentially um zero
tariffs on each other and if you're a company in
the u.s that you know produce let's say um
we'll go back to our lemonade example but
you imported sugar from canada back before the
free trade agreement there could be tariffs
on it and they could be more expensive
once the tariffs are removed they're cheaper
so now your input costs are cheaper because
of these government you know regulations or
the lack of regulations now so now your
supply will be greater at the same price
because your inputs are cheaper so this goes
directly to the idea of inputs as well similarly
we come up with innovations all the time
do things easier more efficiently so new tech
like a new production line that can produce
like three cars instead of two at the
same cost and same price is obviously going to
make it easier for you to produce at a
cheaper price so these innovations are going
to increase supply move the supply curve down
to the right as well. Conversely, destruction
of technology is going to be opposite.
So natural disasters that destroy existing
tech and government regulations on technology,
also other things such as quotas on things
like carbon emissions, can have adverse
effects on businesses in terms of how they
supply. This doesn't mean there's adverse
effects for society as a whole, this is I think
a broader question, but this will reduce
the amount that these businesses can supply.
So it moves the the supply curve up and to
the left okay number of firms so there's
a little bit of intuition here because it
kind of goes the opposite direction to an
individual firm's profitability so remember
for an individual firm it's good if you're the
only firm if there's competition your
profitability is going to get lower but in
terms of of the supply of the good it's the
opposite so as more firms enter the industry
competition increases that means there's
more people vying for the same customers more
output occurring at the same price now
and this shifts supply down and to the right
so more competition for society is a good
thing it creates more of a good at a lower
price shifts down to the right however if a
lot of firms leave the industry this competition
decreases less output is now available
so the supply curve is going to shift up
and to the left so less supply higher price
finally I think this is the last one
substitutes in production. So many firms are
adaptable to several products. Their
production lines can do multiple things.
There's a lot of companies that
actually make multiple products. A simple
example is a company could make
both cars and trucks and the way they decide
to divvy up their production process of
cars and trucks depends upon how much profit
they can make for each car sold in each
truck sold. So for example if there's some
shock and the prices of cars rise by 10
grand each then the automakers will know
based on their current setup they should shift
some production to cars and away from trucks
it can increase their profit based on their
current cost benefit setup so what they'll
do is maybe they'll take 20% of their
truck assembly lines and convert them to car
assembly lines so in the market for trucks
what's going to happen is it's substituted
away from trucks to cars so it's going to
decrease the number of trucks produced
at a specific price shifting the supply
curve of trucks up and to the left and for cars
this would shift the supply curve down and
to the right as well oh yeah i lied there's
another one taxes this is a big one actually
so this happens all the time taxes will
reduce supply it just makes things more costly
than they would be otherwise more costly
in terms of how the tax is implemented we have
two types of taxes we're talking about
here on supply there's the excise tax so a
tax on each individual unit sold where tax
revenue is collected from the supplier and this
is a flat run so no matter what the price
is no matter how many goods sold it's always
going to be the same amount of tax on each
unit so it could always be 20 cents whereas an
ad valorum tax it is latin ad valorum for
according to value and this is a percentage
tax based on the price where the product is
sold so this is going to be different based
on the price point so let's look at the excise
tax first so s0 is our supply curve before
the tax and then we have this 20 cent tax
per unit implemented so it's going to shift
our supply curve up and to the left this
increases the marginal cost for the seller
so as you can see at t here at this point here
sorry not at t at this point here adding the
tax t increases it to a dollar 20 at the
same quantity so back at a dollar now you
see that there's less quantity being supplied
something really important to notice here is
that these two lines are parallel so it
doesn't matter where this occurs really on the
demand curve it's going to have very similar
effects in terms of market distortions
whereas now you'll see the ad valorum tax is
quite different this is a percentage tax so
two examples at ten dollars here quantity
of 1100 a 20 tax on 10 dollars 10 times 0.2
is an extra two dollars so as you can see we
move up to here this is how the supply curve
shifts here however at 2450 units at 20
dollars 20 percent of 20 dollars is four dollars
so the absolute number of the tax is no
longer two is increased to four so you can see
this is now occurring up here so in terms of
the supply curve this isn't parallel this
is more sloped and the further you get away
from the origin here the higher the price
the more distortion is going to be because of
the ad valum tax. How much tax are people
paying will differ depending on if the price
is 10 or the price is 20. In both cases
though a tax will result in a supply curve
shifting up into the left. So similarly to our
demand function we can have this linear supply
function which is made up of our intercept
the the price of the good X that we're
interested in the price of inputs w the price
of technology and other related goods the
cheaper tech is the more you're going to
produce and some other values so here this
parameter here outside of the price of the good
is always going to be greater than zero is
positive this is just the law of supply if
you can make more money from selling a unit
that means you're more willing to produce
more because when you produce more it's more
costly but now you can make more money from
it so people will increase their supply
whereas input prices w here as input prices
increase it's more expensive to make the same
amount of units so you're going to have
to reduce your supply compared to before so
this is a negative sign finally technology lowers
the cost of producing are good so the
cheaper the tech the easier it is going to
produce more similar to before these signs
before matter a lot and we can do calculus as
well to find out the magnitude so we have
a pretty basic example here as well if the
quantity supplied is equal to 2000 plus 3 the
price of x minus 4pt minus 1pw they switch
up the the variables way too much here for
my liking the question is how many televisions
are produced when the price of the the
televisions 400 the price of of w which is the
way they define it is input price here
1400 and the price of technology is 250 we
can literally just plug in these numbers where
they all are and we end up with 800 TV so
fairly straightforward I don't spend too much
time on this the more interesting thing is
getting our inverse function supply remember
we graph everything with price on the y
-axis, quantity on the x -axis. So we want to
get this equation in terms of the price of x
as a dependent variable. So we keep pt at
250 and pw at 1,400. And now we have two
unknowns, our quantity and our price. So this
simplifies to 1,000 and this is 1,400. Together
it's minus 2,400. So 2,000 minus 2,400
gives us quantity equals 3px minus 400. We
take 400 to the other side, q plus 400,
then divide everything divided by 3. So the
3px just becomes p, and then we get 400 divided
by 3 and q divided by 3. And that's how we
turn the function from this way into our
inverse supply function in terms of price and
then we can draw our supply function as
per normal this is a positive slope so it is
increasing price increases as quantity increases
so producer surplus is very similar to
consumer surplus so what we want to think
about is the minimum amount it costs for a
firm to make a good a unit of a good and based
on our ideas of profit they're not going
to sell that they're not going to produce it
and then try and sell it if they know they're
going to make less than it costs so the
producer surplus is how much they can make
by selling it minus the cost of production
so if it costs you five dollars to make a
good what's the most you'd be willing to sell
it for yeah the most yeah anything what do
you think it is what about 101 would you
sell for 101 infinite you'd sell the infinite
if you can but like obviously that's not the
case but your producer surplus is your price
minus the cost of production in that unit
another way to think about this is what
is the least amount you'd be willing to
accept so going back to our game with Vegemite
you were supplying me with your labor and
anytime we think about labor like think about
a job you have to like I don't know clean
dishes for an hour after this what's the
minimum amount of money I'm going to pick on
you again minimum amount of money you'd accept
for that task right hour after class clean
dishes for an hour how much does it cost
you what's the minimum amount you'd be willing
to accept 20 bucks so that means that's
pretty high I must say so so someone offered
you 18 that means you're getting less
than what's the minimum amount to accept so
you wouldn't accept it you accept anything
that is 20 and above so if you accept 25 your
producer surplus here is going to be five
dollars it's the amount you get the price minus
the minimum amount you're willing to
accept. So that can be labor, that can be selling
a good, any of these. So that's how I want
you to think about consumer and producer
surplus respectively. Consumer surplus
the most you're willing to pay
minus price, producer surplus the
least amount you're willing to accept
or price minus the least amount you're
willing to accept and that will give you
the producer surplus. So suppose the seller's
supply curve and individual sellers is
p equals 44 plus 2q in order to produce and
sell 20 units what price must they receive
and suppose this firm operates in a perfectly
competitive market that means they can't
set the price we call them price takers the
competitive market sets what the price is
and they know they can sell this good for $100
in this competitive market how much do
they get in excess is in what's their
producer surplus for the 20th unit so we can do
this so the 20th unit we can see how much it
costs our supply curve is just essentially
a cost curve at the end of the day so at
20 units we just plug 20 into Q here and we
find that the 20th unit the marginal cost of
producing this is 44 plus 2 times 20 which
is 84 so they can get a hundred dollars for
this unit then the producer's surplus of
creating and selling the 20th unit is the
price minus the minimum amount they're willing
to accept which is the cost 84 so they get
16 dollars of producer surplus and if you
think about the 19th unit here the 19th
unit is going to be 44 plus 2 times 19 so
that's going to cost 82 dollars not 84 so their
producer surplus here would be 18 so they'll
keep producing up until the the marginal
cost here would equal 100 and there's no
more producer surplus So similar, so here
we go, here's our supply curve. So it
intercepts here at 400 divided by 3 and it
keeps going up here. So our area here,
in between price and above our cost
curve, our supply curve here is the
producer's surplus. So 400 divided by
3 I think is 133 .3, if I've done my
mouse correctly. Can someone
confirm quickly? Yeah? Okay, great.
So this person here would be willing
to sell for $134 and above. They're
selling for $400, that's the price,
so this entire line is at individuals
producer surplus. Someone here, the
cost of producing the unit is $398, but
by selling at $400, they make $2 surplus,
a little bit here. And adding all
those up gives us our producer surplus. Similar to consumer
surplus, it's just the length times the width
in a similar way, divided by two to get the
actual number in there so nothing different
about our geometry it's all the same so
let's talk about the competitive market
equilibrium we've talked about demand we've talked
about supply let's just refresh ourselves how
they interact so this idea of equilibria
is determined by the market demand and market
supply curves and at equilibria we say that
price and quantity are derived in such a way
that there's no shortage or no surplus of goods
in the market and there are forces that
drive market demand and market supply and
this pressure brings it down to equilibrium once
we're at equilibrium this is why we use
the term equilibrium it's stable there are
no forces or pressures that kick it out of
equilibrium so here we have our demand curve
our supply curve and our equilibrium here is
a five hundred and ten dollars five hundred
quantities produce ten dollars this is stable
there's no forces pushing things up or
down for example let's say for some reason the
price is at five dollars what happens at five
dollars so at five dollars we see that
there's a lot of goods being demanded 750 but
this price is low this good could be costly to
produce and suppliers only want to produce
250 so this means that there is a shortage
at a price of five dollars as we can see
with only 250 units being produced if we move up
into the demand curve here only buyers above
this point are going to be the ones that
are able to buy for example however there's
a whole chunk of buyers in between this point
here the 250 up until 500 who would be
willing to pay more even if the price was a
bit more expensive so it's six dollars here
we know for a fact that this buyer here who
currently doesn't have a good because there
isn't enough would pay so what will happen
here is the price will increase which incentivizes
producers to make a little bit more so
at $6 there'll be like 50 more units produced
buyers will get value from buying at $6
they'll buy it and these forces will keep pushing
up all the way until equilibrium and it's
the same thing with a shortage so sorry a
surplus not a shortage so let's say their
price is fifteen dollars producers will be
making a lot they'll be producing 750 units
because the price is 15 but a lot of buyers will
be like ah it's above my willingness to pay
i'm not going to buy however at this point
producers will realize that they can lower
the price slightly produce less and lower
the price and there will be people that will
buy the product once the price is lowered
so this puts pressure on producing less than
before there's excess that's not being sold
and the lower the price you'll actually
make a profit because like before we can see
that only 250 units are being sold in
this situation because only 250 people demand
it but as a seller here you know if you're
at this point and it costs you $7 that even
if the price lowers so let's say $10 here
you're still going to make a profit by
selling the $7 unit so there are these forces
here that bring the prices down to equilibria
as a result of the the the surplus at the
price of 15 dollars and this is a a
short video that illustrates this a
little bit as well a little bit of context
sorry um i should go back a little
bit of context it's a random clip
it's from a cohen brothers movie called
the hard sucker proxy and this guy
the the main character has just invented
the hula hoop has just invented
the hula hoop so this is like really
important actually so economists love
prices because prices help coordinate when
there's a lot of chaos going on so we can
see here we have our original supply and demand
curves and at a price of $1.79 no one
wants to buy the hula hoops and he keeps
reducing the prices until they're essentially
free because of this excess supply and he
ends up throwing them all away but what
happens in this video is they all the kids see
this one kid playing with it and a fad's
created and we know what a fad does to demand
it increases demand and it shifts demand
up into the right increases demand at the
same price so now it we were currently at
here or here the hula hoops were free but
now there's a lot of demand for them so
at free like there's probably thousands of
kids now that want them. So to create a situation
where there isn't a shortage anymore
because there's not enough being produced by
increasing the price the producing can create
more and more at a higher marginal cost
and sell it to kids who are willing to pay
that price up until we get to this point
of efficiency. So this is how the pressure
of the markets get to this point here after
this demand increase. So the way to look at
this is if the quantity demanded is greater
than the quantity supplied that means
that there is a shortage and prices will
rise to clear this shortage if there's too
many people that want and not enough goods
producers can make more increase the price
and that will clear the shortage vice versa
if quantity supplied is more than quantity
demanded there's a surplus and prices
will lower to get rid of this excess goods
because as we lower the price there will
now be more people who are willing to buy
the product at that point and when the
quantity demanded equals quantity supplied we
say that this is an equilibrium so Q star
is our equilibrium point of quantity and
that's when quantity demanded equals quantity
supplied so we use P star and Q star to
denote equilibria and to find the market
equilibria all you need to know is where do the
quantity demanded and quantity supplied
curves interact so our supply and demand curves
so we have our demand curve here 10 minus
2p supply of 2 plus 2p we want to make them
equal to each other as we've done here and
solve for p so just doing the basic algebra
here just taking things to the other side
in terms of p we find that p star or pe however
you want to define it the equilibrium
price is two dollars and to find the equilibrium
quantity you plug this two dollars back
into either of the equations it doesn't
matter which one it will give you the same
answer as you can see here 10 minus 2 times
2 which is 4 gives you six and two plus two
times two two plus four equals six it gives
you the same answer so i want to take a
little bit of a step back um there's a more
i think interesting philosophical question
about how we allocate resources in society
so um resources are scarce um it would be
nice if we could give everyone everything
they ever wanted but we can't do that scarcity
means we've got to make tough decisions
so there's a question how do we allocate these
scarce resources some of these resources
might be luxuries others could be necessities
it can be really tough to decide and the
question is how do we allocate them so do we
do a first-come first -served kind of proposal
first one in line gets the good what
about giving the goods to people of certain
hair colors if you have blonde hair you get
first dibs on all the goods probably would
be a great way to organize society. So
free market economists say the price system is
the best way to allocate resources. So people
who are willing to pay to receive the
good and able to pay to receive the good should
receive the good. They argue that this
is the most efficient way of allocating
resources as it maximizes overall surplus.
And there's a little bit of I think a
catch in here that the definition of surplus
is kind of this idea of the difference between
willingness to pay and the price. So it's
kind of baked into this idea of efficiency
in the first place, which is important
to note, but also efficiency does not
necessarily equal fare. Someone might really
want something or need something. They might
actually be willing to pay for it, but
they might not have the money. So economists
wouldn't say we should allocate them the
resources we say in times of scarcity we should
allocate them based on this idea of price so
there's definitely a lot of debate here like
not enough for this little class like full
courses have been you know designated to
the ideas of political philosophy which is what
this is so economists love the idea of
free markets because they're efficient
which means they really dislike price controls
because they create inefficiencies so there
are two types of price controls they can limit
how high or how low a price is legally
allowed to go so price ceilings limit how high
a price can go when a price ceiling is set
below the equilibrium price shortages result
so in our example here the equilibrium price
is at ten dollars and the government could
say you're not allowed to sell this product
above five dollars so what this would
mean is at five dollars which is a lot cheaper
than an equilibrium there's going to be a
lot of people that want this good because if
you originally valued it at six dollars now
it costs five not ten yard yeah i'll buy it
i get you know consumer surplus of one dollar
except for a lot of producers now it's
not worth producing at five dollars so there's
a lot less and as a result we have a shortage
of 500 which means there's not enough to
go around and a lot of people as a result
who would be willing to buy it in the first
place no longer can. Similarly price floors
limit how low a price can go so when a price
floor is set above the equilibrium price
surpluses result. So the government could
say the minimum price you're allowed to
sell a good for is $15 this is above our
equilibria that means a lot of producers will
increase their production because they can sell
each unit for $15 but at $15 it's not worth
it for a lot of buyers to purchase anymore if
you originally valued this good at 14 you
would buy it when it costs 10 but not when
it's 15 so no one below c is going to buy it
anymore so we have this surplus of 500 units
now of units that are being produced and not
sold so a price control is binding if it
pushes the market away from its equilibrium
and it's non-binding if it has no effect on
the market so the way i want you to think about
it is the price floor and the the price
ceiling kind of create a house and if the the
the the sorry um yeah and if the the the
object in the house which is our market equilibrium
is between then it's fine but if the
if the ceiling is below that means our
equilibrium is no longer inside the house it's
outside it's above the roof ceilings below
it it's going to enact and it's the same thing
if our little object is below the floor
so the floor is above our point here e that's
going to mean it's going to be binding
as well but if it's in the house if it's above
the floor and lower than the ceiling it's
not going to bind the market's just going
to take place as normal if our price floor
is five dollars then it's not going to take
effect because the lowest price at equilibrium
is 10 and if our price ceiling is at
15 it's not going to take effect because
the price isn't that high to begin with so
I guess an intrude way to think about it your
market equilibrium is a little ball or
a little dot if it's inside the house nothing's
binding but if it's below the floor or
above the ceiling then it's going to be
binding so yeah think of your little houses
Why would a government put a non-binding price
here on your board? Great question. It probably wouldn't. Yeah, I can't
really answer that. But yeah, like,
that's, I guess, trying to talk
about the idea of what is a binding
price. But yeah, that would be a pretty
silly government to do that. It
has no effect. So what are the welfare
effects here? so what happens here when
we put in this this price ceiling as you
can see here is we have a lot of people demanding
it but not a lot of people producing
it now so even though the price is is low
now at c we only are producing at qs which
means there's only zero to qs units so only like
this amount of people can get it up to f
here so what we have here is there's a whole
bunch of consumers between qs and qe who
want to buy the product and who would at the
market equilibrium prices this person here
would buy the product when it was here but
now they're not able to anymore and there
were sellers that would sell the product in
between qs and qe like here at prices but
no longer can so we're essentially restricting
how much trade is possible as a result
we have this deadweight loss, this inefficiency,
trade that would have happened without
this price ceiling. Another way to think
about it is that price ceilings create these
shortages so there's more fighting over
these goods. As I've shown an example, it
can create long waiting times and these
opportunity costs to be the one to get the resource
allocated. For example, if I only, you know,
I could have had a, I don't know, what's
a good example? Let's say I had a pen for
every one this class a really nice pen i
could give it to everyone you pay a price whatever
but if there's a price you know ceiling
impose then i only want to maybe give out
five i might have to you know get you to
come earlier to class to be the one who can
buy it so that you know puts time pressure
on you to leave your class before earlier
rock up to class early etc which is opportunity
cost you could be doing more with that
time so the full economic price of a market is
the dollar price plus the non-pecuniary
price which is the opportunity cost of
waiting and the way we calculate that is the
price at the point where the the demand intersects
with the amount being produced now
minus where the supply intersects with the
amount being produced now so pf minus pc is our
non-pecuniary price and this means that the
economic price at perfect competition is
always going to be um uh sorry it's going to
be lower it shouldn't be sorry the economic
price when there are price controls in place
are going to be higher than when there's a
competitive market because this is always
going to be zero at the competitive market
pf equals pc here so where demand equals
supply at the price point whereas here the price
of demand is at f and the quantity
here is PC. So we can calculate
this as well. So assume we have
the following two supply and
demand equations. We can find our
competitive equilibrium in the same way, equate
them to each other. This is the key
step, always equate them to each other.
The algebra is fairly simple and we have
an equilibrium price of $22. That's our
economic price in a competitive market
and a quantity of six. Now, if we
introduce a price ceiling, this
market of $15, it's going to be
binding, it's below $22, it's going to be binding
this price ceiling, and all we need
to do is plug this new price into both
our demand and supply equations, and we
figure out the excess, or shall I actually
say, the shortage in this situation. So we
get 20 units demanded at $15, and only 2
.5 units supplied, which gives us an
excess of 17.5 units. and we can also calculate
what the economic price is we know the
first part the actual price itself the
accounting price as we say is 15 and the
pecuniary price is as we looked before pc
which this is what the actual ceiling is sorry
pf minus pc so pc is the ceiling we know
what the ceiling is 15 we just got to figure
out what pf is and pf is the intersection
of the new quantity when we implement
this price ceiling and the
demand curve so we know what this
new quantity is the quantity is 2.5
that's what the supply is here so we plug
in as you can see this is this is 2.5
here so we plug in this 2.5 into the
demand curve here so 2.5 equals 50 minus 2px
and we solve for p and that equals 23.75
so pf is 23.75 going back here 23.75 15
and that difference is as you can see 8
.75 so we add it up together and that gives
us our economic price and this is higher
than our competitive economic price which
is 22 which kind of shows that you've done
the right thing so some famous examples of
situations where you might have price
ceilings or price floors so this is where I had
my image of the the expensive toilet
paper so the prices of toilet paper kind of got
out of control during the pandemic the
government if they wanted could have put a
price ceiling on it they could say you
can't sell toilet paper for more than two
dollars but what would have happened is this
would have created a shortage a lot of
companies wouldn't have the incentive to produce
anymore and things would have been more
batshit insane at the grocery stores and
they already were in terms of getting your
hands on it similarly there's a famous example
of gas lines in the 1970s they had a price
ceiling on gas you couldn't sell it for
more than 85 cents as a result there wasn't
that much being sold not that much production
so you ended up with these really really
long lines so a lot of people would waste i
think up to three four hours to get gas so
economists would say raise the price those that
can afford it will get it those who can't
can use it you know their time to do other
things like take public transport but these
are ways to get more efficiency and reduce
the dead weight loss from the opportunity cost
of waiting for time finally with price
gouging um this happens a lot during like storms
and natural disasters which reminds me i'm
probably need to buy a torch and some other
things in case power goes out the next couple
of days i hear it's not that big a deal
here but usually during like natural disasters
there can be like power that goes out
for three days and if that's the case you need
to get a torch people sell them for like 50
bucks 100 bucks a price gouge a lot of people
find this repugnant um because it's taking
advantage of people in need but a lot of
economists would argue this is actually a good
thing one it's a way to eliminate shortages
but also it incentivizes people from out of
town to drive in with torches and sell
them because they're incentivized by this
higher price they wouldn't do it if it was five
dollars a torch and i have this hoarding
versus producing thing here just to make an
example of difference so in that example there
you might think yeah like people might be
incentivized to come down and you know increase
the supply of torches which could be a good
thing even though the price is a lot higher
but in the pandemic what was happening was
a lot of people weren't producing they were
just you know hoarding supplies of toilet
paper and hand gel and all that sort of things
and reselling them at a high price so
they weren't actually producing anything more
they were just like taking advantage of
everything else so I mean price gouging I think
is fascinating I do a bit of work on this
repugnant attitude so if you ever want to discuss
this feel free and in terms of price floors
which we'll discuss now there's a couple
of famous ones like agricultural price floors
so the the government will say that the
the lowest price that you can sell barley for
or corn or something like that is three bucks
and also the minimum wage is probably the
most famous price floor you can't pay
someone less than a certain amount so when there's
a price floor what's going to happen is
we're going to have this surplus so we're
going to have a lot more production than that's
being sold at this higher price only qd
is going to be demanded so only this much gets
sold so like before we're going to have the
same triangle of dead weight loss if the
price was lower if it was here there would
be more people wanting to buy the product and
more people able to sell the product so
we have this same blue triangle as before but
we've added in this x1 red unlike with demand
if there's excess demand if someone doesn't
get something like that sucks but they
don't waste money like producing anything whereas
here if you produce and you can't sell it
you've paid costs costs up front producing
but you can't get rid of those costs you can't
offset it so anything after this point after
QD is not getting sold and remember our
supply curve is a cost curve so this point
down here on the x-axis up until the supply
curve is the cost of producing the unit so
everything down here up until the curve is
cost of production that aren't being sold so
everything from QD to QS under our supply
curve is also going to be deadweight loss so the
cost of a price four being implemented
could be much higher similar to before if we
introduce a price four of 24 we can figure
out what the excess is by plugging it
into our demand and our supply
curves so only two units of quantity are
demanded at a price of 24 and seven
units are produced and as a result we
have an excess of five units and if you want
you can also calculate how many like units
aren't being sold as well and how much it costs
you need a little bit more information
here but yeah you can technically do that as
well so the minimum wage is a classic example
here the the equal 101 argument is that if
you implement a minimum wage it's going to
distort the labor market there's going to be a
lot of people wanting to supply their labor
but a lot of firms not willing to hire
so this will actually result in more employment
the empirical case is a lot more mixed
there's some famous studies that show the
implementation of a minimum wage doesn't actually
distort employment all that much very
mixed evidence here it depends on the type of
market we're in as well in a competitive market
there's reason maybe not to but not all
markets are competitive there's something
called monopsony where there's only really
one firm hiring and as when we talk about
later with monopoly it's the same sort of thing
they'll take advantage of being the only firm
and like put wages below what the market
equilibrium will be so minimum wage will
actually be an efficient thing in that circumstance
so there's a lot of moving parts you've
got to take like a labor econ subject to
get into the weeds here I just wanted to say
it's not as simple as what we show in 101 and
also with agriculture as well when there's
excess products the government can sometimes
purchase the surplus which is not as price
support so they're willing to pay a cost
of PF this amount here for QD to QS so if
they're able to do this it's a way to eliminate
these inefficiencies it's still not perfect
but if I purchase it and can't redistribute
it or can't reuse it, whatever they've bought
for other products, it's still going to
be a deadweight loss. So there are ways
that governments can reduce it, but
there are also ways where it just is
still deadweight loss. Finally, for
today, I know we're racing through a
lot. All this is needed for the
homework tonight. We want to look at
how equilibrium in markets change when
the demand changes, the supply changes,
or both changes. So when it's just
demand, that change is pretty straightforward.
if it shifts up and to the right if we have
an increase in demand it's going to result
in two clear things at the new equilibria at
b compared to a both the price and the
quantity have increased if it decreases both the
price and the quantity will decrease fairly
straightforward same with supply if our
supply from equilibria a if we have a supply
shift downwards the new equilibria will
have a lower price and higher quantity in
equilibria and if there's a decrease in supply
as you can see here at B there's less quantity
at a higher price interestingly though
what happens if we have changes in both
suppose that simultaneously the following events
occur an earthquake hits Kobe Japan and
decreases of the supply of fermented
rice used to make sake wine so this input is
now going to be more expensive it will shift
the supply curve up and to the left. Meanwhile,
the stress caused from the earthquake
leads many to increase their demand for sake
and other alcoholic beverages. People
like to drink when things go bad. Pandemic's
a great example of that. So what
happens to the market equilibrium? What happens
to price and quantity? The answer is it
kind of depends. So there's a lot going
on here, but just look at the two zero
curves, D zero and S zero to start. So we're
at A here, our market equilibrium. If demand
increases so d1 demand for sake we move to
this point here where my mouse is and both
price and quantity would have increased
at this new equilibrium but if supply is also
moved in this case decreased to s1 we're
now at b the intersection of d1 and s1 and here
both price and quantity have increased at
b1 going from a to b however we don't know
how much s1 has moved it could have been a
greater reduction in supply going to the S2
curve here and you can see it see that while
price is increased, quantity is decreased
in this equilibrium. So all we can say for
sure that when there's an increase in demand
and a decrease in supply is that price
increases. We don't know what happens to
quantity. It depends on the actual shifts
themselves and it's the same with any
interaction between the change in supply and
a change in demand. So as you can see
here that we have our decrease in supply
increase in demand price increases quantities
ambiguous but for any