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SUPPLY AND DEMAND (3.5.2)

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Table of Contents

Market for Tickets “Price Ceilings andPrice Floors” Targets Price Ceilings “Price Ceilings and

Price Floors” Targets

Price CeilingsAre Inefficient

Price Floors

Pros and Cons ofPrice Controls

Price FloorsAre Inefficient

Quantity Controls

Access PriorKnowledge

Set GoalsNew

InformationConclusion

Price Controls

Activity

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Market for TicketsRead the following passage from a New York Times newspaper article and answer the three questions that follow. After you have answered the questions, pair up with another student and discuss your answers. Then, use the graph on the back to follow along with the teacher.

Go to the Article

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Market for Tickets

Answer These QuestionsOn Your Paper

“In the Race to Buy Concert Tickets, Fans Keep Losing”By Ellen Rosen

Published 6 October 2007 in the New York Times

Lisa Senauke, a Bruce Springsteen fan since 1973, tried to get tickets to his Oct. 26 concert in Oakland, Calif. The tickets were to go on sale at 10 a.m. on Sept. 17, and starting at 9:58 a.m., she logged into her Ticketmaster.com account, credit card in hand. But though she tried again and again for the next hour to buy tickets, she was always told the same thing: nothing available.

Ms. Senauke’s frustration is not isolated. The coming concerts of…Miley Cyrus…sold out in minutes. And the same thing happened with tickets to recent reunion tours by the Police and Van Halen.

While some fans just quietly give up, others have complained to government officials, particularly after they found tickets to the same concerts available -- sometimes at many times the face value -- on secondary sellers like Stubhub.com and TicketsNow minutes after the public sale began.

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Market for Tickets

Go to the Graph

“In the Race to Buy Concert Tickets, Fans Keep Losing”By Ellen Rosen

Published 6 October 2007 in the New York Times

Lisa Senauke, a Bruce Springsteen fan since 1973, tried to get tickets to his Oct. 26 concert in Oakland, Calif. The tickets were to go on sale at 10 a.m. on Sept. 17, and starting at 9:58 a.m., she logged into her Ticketmaster.com account, credit card in hand. But though she tried again and again for the next hour to buy tickets, she was always told the same thing: nothing available.

Ms. Senauke’s frustration is not isolated. The coming concerts of…Miley Cyrus…sold out in minutes. And the same thing happened with tickets to recent reunion tours by the Police and Van Halen.

While some fans just quietly give up, others have complained to government officials, particularly after they found tickets to the same concerts available -- sometimes at many times the face value -- on secondary sellers like Stubhub.com and TicketsNow minutes after the public sale began.

1) In terms of supply and demand, what problem exists in the market for concert tickets?2) Is this market in equilibrium? How do you know?3) What is one idea you can think of to help solve this problem?

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Market for Tickets4) Use the data and graph below to complete the following.

a) Plot the data points onto the graph. Use all necessary labels.b) Suppose Miley Cyrus only charges $60 per ticket. Draw this priceceiling on the graph.

Price ($)

Demand(thousands)

Supply(thousands)

$20 90 10

$40 80 20

$60 70 30

$80 60 40

$100 50 50

$120 40 60

$140 30 70

$160 20 80

$180 10 90 Draw Graph Go to Conclusion

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Market for Tickets4) Use the data and graph below to complete the following.

a) Plot the data points onto the graph. Use all necessary labels.b) Suppose Miley Cyrus only charges $60 per ticket. Draw this priceceiling on the graph.

Price ($)

Demand(thousands)

Supply(thousands)

$20 90 10

$40 80 20

$60 70 30

$80 60 40

$100 50 50

$120 40 60

$140 30 70

$160 20 80

$180 10 90 Draw Graph Go to Conclusion

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Price Ceiling

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Market for Tickets5) What is the equilibrium price and quantity in this market?6) If the price Miley Cyrus charges for each ticket is below equilibrium, why doesn’t she raise her prices?

Price ($)

Demand(thousands)

Supply(thousands)

$20 90 10

$40 80 20

$60 70 30

$80 60 40

$100 50 50

$120 40 60

$140 30 70

$160 20 80

$180 10 90

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Price Ceiling

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“Price Ceilings and Price Floors” Targets

KnowledgeUnderstand the effects of price ceilings and price floors.

ReasoningDescribe the positive and negative consequences of price ceilings and price floors.

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Price CeilingsGovernments occasionally intervene in the free market by creating a price

ceiling, which is a maximum price sellers are allowed to charge.

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1) The Price Ceiling

A) Government may decide to limit prices to help consumers.

One example of a price ceiling is the market for apartments in New York City. The government limits the price apartment owners can charge their tenants.

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Price Ceiling

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Notice how the equilibrium price is $1,400, but the price ceiling only allows landlords to charge $800.

This is called a binding price ceiling.

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Price Ceiling

B) Price ceilings are only effective if placed below equilibrium.

Equilibrium

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In this example, 5 million apartments are demanded, but only 2 million are supplied. There is a shortage

of 3 million apartments.

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C) Price ceilings cause shortages.

Shortage

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Shortage

2) Shortages

A) A shortage means not all demand can be satisfied by the supply.

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Shortage

2) Shortages

A) A shortage means not all demand can be satisfied by the supply.

B) Market forces are unable to push the price back to equilibrium.

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Price Ceilings Are InefficientPrice ceilings cause a market to be inefficient because there are missed

opportunities for transactions.

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1) Inefficient AllocationConsumers who really want the good do not get it, and those who care only a little do get it.

In New York City, some people desperately need an apartment. Current residents, however, might want

to move but do not want to give up their spot.

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Consumers who need an apartment in New York City end up spending a great deal of time and money

looking for an available apartment.

2) Wasted ResourcesConsumers spend extra time and money dealing with shortages.

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Because price ceilings limit a landlord’s revenue, he/she will often cut costs in undesirable ways, such

as neglecting needed building maintenance.


3) Inefficiently Low QualityDue to lower prices, suppliers offer a low-quality product even though buyers prefer higher quality.

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New York City apartments will often be sublet to other individuals illegally, or the landlord may allow a tenant to rent from him/her in exchange for monthly

bribes.


3) Inefficiently Low QualityDue to lower prices, suppliers offer a low-quality product even though buyers prefer higher quality.

4) Black MarketsDue to shortages, goods may be exchanged illegally at a higher price.

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Price FloorsGovernments occasionally intervene in the free market by creating a price

floor, which is a minimum price buyers are required to pay.

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1) The Price Floor

A) Government may decide to raise prices to help producers.

Price Floor

One example of a price floor is the market for milk. The government sets a minimum price for milk in

order to help America’s dairy farmers.

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1) The Price Floor


Price Floor

B) Price floors are only effective if placed above equilibrium.

Notice how the equilibrium price is $1.00, but the price floor ensures that each gallon costs a minimum

of $2.00. This is called a binding price floor.

Equilibrium

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1) The Price Floor



C) Price floors cause surpluses.

In this example, 1100 million gallons are supplied, but only 300 million are demanded. There is a

surplus of 800 million gallons.

Surplus

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1) The Price Floor






Surplus

2) Surpluses

A) A surplus means demand is smaller than the supply.

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1) The Price Floor






Surplus

2) Surpluses

A) A surplus means demand is smaller than the supply.

B) Market forces are unable to pull the price back to equilibrium.

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Price Floors Are InefficientPrice floors cause a market to be inefficient because there are missed


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1) Inefficient AllocationSuppliers who are willing to sell at a lower price are not able to do so.

The minimum wage is considered a kind of price floor where workers are the supply. Employers are willing

to hire more people but wages are too high.

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Some agricultural products have price floors. The surpluses are either burned or are allowed to go bad

before being thrown away.

2) Wasted ResourcesThe resources used to create surpluses are essentially wasted.

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International airfares used to be regulated with price floors. Airlines provided lavish in-flight service, but

what people really wanted was cheap airfare.


3) Inefficiently High QualityDue to high prices, suppliers offer a high-quality product even though buyers prefer lower quality.

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To get around the minimum wage law, workers who are desperate for a job are sometimes willing to be

paid a lower wage under the table.


3) Inefficiently High QualityDue to high prices, suppliers offer a high-quality product even though buyers prefer lower quality.

4) Illegal ActivityDue to surpluses, goods may be exchanged illegally at a lower price.

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Quantity ControlsGovernments can also intervene in the free market by controlling quantity. A

quota is the highest quantity of a good or service that can be supplied.

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Many fish in the United States are regulated through quotas. This means that fishermen must receive a

license in order to catch a predefined amount of fish.

1) Government sets a quota limit by issuing licenses to suppliers.

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Quota



Notice that the quota is 3,000 pounds of salmon. This is 2,000 pounds short of the equilibrium quantity.


2) If the quota is less than equilibrium, a wedge is driven between the demand price and the supply price.

Wedge

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Quota



When the quantity is 3,000 pounds of salmon, consumers are willing to pay $7 per pound while

producers only want to charge $3 per pound.



Wedge

3) Buyers pay a higher price than the price received by the seller.

DemandPrice

SupplyPrice

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Quota



Consumers are charged $7. Because the license is a hot commodity, however, a license holder could sell

the license for $4, which is the value of the wedge.



QuotaRent

3) Buyers pay a higher price than the price received by the seller.

DemandPrice

SupplyPrice

4) The difference in prices is the quota rent -- the earnings made from the right to sell the good.

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Pros and Cons of Price Controls

Pros Cons

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Pros Cons

Price ceilings help keep prices low for consumers.

The price ceiling for New York City apartments has helped keep prices low for people who

actually have apartments.

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Pros Cons


The price floor in the milk market has helped keep prices high for America’s dairy farmers.

Price floors help suppliers make more money.

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Pros Cons


Regulations on fishing ensure that seafood populations will not be fished out of existence.


Quantity controls may have environmental benefits.

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Pros Cons


Ticket prices to professional sports events are generally low to ensure that even low-income consumers can occasionally go to a game.



Price controls can correct allocation problems.

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Pros Cons


Because performers want to ensure a sold out show, ticket prices generally remain below

equilibrium, causing shortages.




Causes persistent shortages or surpluses.

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Pros Cons


The oil crisis of the 1970s caused the U.S. government to set price ceilings on gasoline. People had to wait in long lines at the pump.





Resources are not allocated efficiently.

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Pros Cons


Due to price ceilings in the concert ticket market, people find it very profitable to buy a bunch of

tickets and resell them illegally at a higher price.






Emergence of illegal and black market activities.

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Pros Cons


Many of the price floors in agricultural markets are a result of powerful lobbyists who have convinced politicians to enact these laws.






Emergence of illegal and black market activities.

Special interest groups push for price controls for political reasons.

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Price ControlsDIRECTIONSUse the graph at the bottom of the front page to answer the questions about the price controls for apartments in New York City. On the back side, use the graph to answer the questions about the price controls for corn.

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“Price Ceilings and Price Floors” Targets

KnowledgeUnderstand the effects of price ceilings and price floors.

ReasoningDescribe the positive and negative consequences of price ceilings and price floors.

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Resources

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SUPPLY AND DEMAND (3.5.2) Begin End ShowTable of Contents Copyright © 2013 N.S