Admin RFH E CS and PS Price Regs Reg. Q
Lecture 2:Using Supply and Demand to Analyze Markets
September 6, 2016
Admin RFH E CS and PS Price Regs Reg. Q
Overview
Course Administration
Ripped from the Headlines
Elasticity, Reprise
Consumer and Producer Surplus
Price Regulations
Quantity Regulations
Admin RFH E CS and PS Price Regs Reg. Q
Course Administration
1. Collect PS 1
2. PS 2 is posted
3. Check Ripped from Headlines assignments
4. You are responsible for what we cover in class
5. Any problems with the course website?
6. Check your GW email – it is how I will communicate with you
7. If there are any Blackboard functions you’d like me to activate(chat room, discussion board), please let me know
8. Other administrative questions or issues?
Admin RFH E CS and PS Price Regs Reg. Q
Ripped From the Headlines
As a reminder, next week
AfternoonFinder Presenter
Marc Hernandez Faith GriggThomas Coyne Nathan Rupp
EveningFinder Presenter
Kaitlin Smith Matt MillerAdam Brooks Thomas Waldrop
Admin RFH E CS and PS Price Regs Reg. Q
Elasticity
• Intuitively, what does elasticity tell us?
• Percentage change in one outcome given a percentage changein another
• E ≡ percent change in quantity demanded divided by percentchange in price = %∆Q
%∆P
Admin RFH E CS and PS Price Regs Reg. Q
Elasticity
• Intuitively, what does elasticity tell us?
• Percentage change in one outcome given a percentage changein another
• E ≡ percent change in quantity demanded divided by percentchange in price = %∆Q
%∆P
Admin RFH E CS and PS Price Regs Reg. Q
Perfectly Elastic and Inelastic Supply and Demand
Draw the usual supply and demand axes.
• If demand (or supply) is perfectly inelastic, what does thecurve look like?
• If demand (or supply) is perfectly elastic, what does the curvelook like?
Admin RFH E CS and PS Price Regs Reg. Q
Perfectly Elastic and Inelastic Supply and Demand
Draw the usual supply and demand axes.
• If demand (or supply) is perfectly inelastic, what does thecurve look like?
• If demand (or supply) is perfectly elastic, what does the curvelook like?
Admin RFH E CS and PS Price Regs Reg. Q
Perfectly Elastic or Perfectly Inelastic Demand or Supply
Admin RFH E CS and PS Price Regs Reg. Q
Using Supply and Demand to Analyze Markets
1. Consumer and Producer Surplus
2. Price Regulations
3. Quantity Regulations
4. (skip in favor of later in depth coverage) Taxes
5. (skip) Subsidies
Admin RFH E CS and PS Price Regs Reg. Q
Consumer Surplus
Consumer surplus ≡ “difference between the amount consumerswould be willing to pay for a good and the amount they actuallyhave to pay”
Admin RFH E CS and PS Price Regs Reg. Q
Getting to Consumer SurplusIs this a person with a little or a lot?
P
D
P*
Q
Admin RFH E CS and PS Price Regs Reg. Q
And this person?
P
D
P*
Q
a lot of surplus
Admin RFH E CS and PS Price Regs Reg. Q
Where is Someone Without Surplus?
P
D
P*
Q
a lot of surplus
a little surplus
Admin RFH E CS and PS Price Regs Reg. Q
And Total Consumer Surplus?
P
D
P*
Q
a lot of surplus
a little surplus
not any surplus at all
Admin RFH E CS and PS Price Regs Reg. Q
The Whole Shebang of Consumer Surplus
P
D
P*
Q
a lot of surplus
a little surplus
not any surplus at all
Admin RFH E CS and PS Price Regs Reg. Q
Identifying Consumer Surplus
• For what goods do you have a positive consumer surplus?
• For what goods do you have a consumer surplus of zero?
• Give an example when your consumer surplus increased
Admin RFH E CS and PS Price Regs Reg. Q
Producer Surplus
• Producer surplus ≡“difference between price atwhich producers are willingto sell their good or serviceand the price they actuallyreceive”
• Above the supply curve, andbelow price, this is surplus
• You are a producer of labor.Have you ever receivedsurplus?
Admin RFH E CS and PS Price Regs Reg. Q
Why Should You Care About Surplus?
• Want to understand overall welfare implications of a policychange
• Welfare is not just P ∗ Q• It is also consumers benefits above the purchase price• And supplier benefits below the purchase price
• And maybe there is a little surplus unclaimed• Founder of Priceline.com said “In putting together an R&D
laboratory [called Walker Digital], one of the problems weworked on was, how do you see the demand curve below theprice of a product? All sellers of products in the moderneconomy sell by posting a retail price, or they negotiate a priceon a market basis. Most prices are set by the seller. When theseller sets the price, there’s a problem: They can’t see howmuch demand there is below the dollar price they’ve set. Wesaid, ‘You know what? Could there be solutions in the new,modern age that would allow sellers to see the demand belowthe price line?’ Hence the name of the company.”
Admin RFH E CS and PS Price Regs Reg. Q
Why Should You Care About Surplus?
• Want to understand overall welfare implications of a policychange
• Welfare is not just P ∗ Q• It is also consumers benefits above the purchase price• And supplier benefits below the purchase price
• And maybe there is a little surplus unclaimed• Founder of Priceline.com said “In putting together an R&D
laboratory [called Walker Digital], one of the problems weworked on was, how do you see the demand curve below theprice of a product? All sellers of products in the moderneconomy sell by posting a retail price, or they negotiate a priceon a market basis. Most prices are set by the seller. When theseller sets the price, there’s a problem: They can’t see howmuch demand there is below the dollar price they’ve set. Wesaid, ‘You know what? Could there be solutions in the new,modern age that would allow sellers to see the demand belowthe price line?’ Hence the name of the company.”
Admin RFH E CS and PS Price Regs Reg. Q
Distribution of Gains and Losses from Changes in MarketConditions
• How do shocks to supply or demand – which might be afunction of policy choices – affect consumers and producers?
• We will analyze impact of decrease in supply
• You should be able to reason out an impact of an increase insupply, or changes in demand
Admin RFH E CS and PS Price Regs Reg. Q
Math Reminder: Area of a Triangle
a
b
• Area of the triangle is12 ∗ a ∗ b
• With linear supply anddemand curves, you can findall the points on a triangle.
• We will always be workingwith linear demand andsupply curves
Admin RFH E CS and PS Price Regs Reg. Q
What if it’s Not a Right Triangle?
a
b
• What do you do?
• Still 12 ∗ a ∗ b
Admin RFH E CS and PS Price Regs Reg. Q
Analyze Impact of Decrease in Supply
• Suppose it rains less in Cote d’Ivoire and chocolate productionsuffers
• We analyze the welfare consequences in the US chocolatemarket
• You can imagine using this framework for policy-induced shiftsas well
Admin RFH E CS and PS Price Regs Reg. Q
Analyzing a Decrease in SupplyInitial Consumer and Producer Surplus
P
D
S
P*
CS
PS
Q* Q
Admin RFH E CS and PS Price Regs Reg. Q
Supply Shifts Inward: What are Pnew and Qnew?
P
D
S
P*
S’
Q* Q
Admin RFH E CS and PS Price Regs Reg. Q
Supply Shifts Inward: New CS and PS?
P
D
S
P*
S’
Pnew
Qnew Q* Q
Admin RFH E CS and PS Price Regs Reg. Q
New Producer and Consumer Surplus
P
D
S
P*
S’
Pnew
Qnew Q*
CSnew
PSnew
Q
Admin RFH E CS and PS Price Regs Reg. Q
New Producer and Consumer Surplus
P
D
S
P*
S’
Pnew
Qnew Q*
CSnew
PSnew
Q
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS =
A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS = A + B + C• PS =
D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS = A + B + C• PS = D + E
• After• CS =
A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS =
B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
Q
D
S
P*
S’
Pnew
Qnew Q*
A
B C
DE
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(D+E )−(B+D) = E−B,sign ambiguous
• Note that nobody gets Cor E after
Admin RFH E CS and PS Price Regs Reg. Q
Price RegulationsTwo Flavors
1. Price Ceiling ≡ a regulated “highest lawful price for a good orservice”
2. Price Floor ≡ a regulated “lowest lawful price for a good orservice”
Price regulations distort market outcomes. Some trades that wouldoccur in equilibrium do not occur.
Admin RFH E CS and PS Price Regs Reg. Q
Using Math to Understand Policy Implications
We assume Pceiling < Pmarket . We’d like to know
• how much worse off producers are
• how much better or worse off consumers are
• what the difference is between these ≡ transfer
• how much surplus is lost
• Deadweight loss ≡ reduction in total surplus as a result ofmarket inefficiency
Use algebra and geometry to do this. What does your intuition tellyou happens to quantity when the government setsPceiling < Pmarket?
Admin RFH E CS and PS Price Regs Reg. Q
Should be Quite Clear to VenezuelansVenezuelan Presidents Chavez and Maduro Respond to Inflation with Price Ceilings
Admin RFH E CS and PS Price Regs Reg. Q
Policy Aside: Other Price Ceiling Examples
• Cottage cheese in Israel• in 2011, government removed price ceiling and prices spiked,
leading to a revolt and a return of a ceiling
• Corn tortillas in Mexico• ceiling lifted in 1999, reimposed in 2007 amid soaring corn
prices
• Other favorite examples?
Admin RFH E CS and PS Price Regs Reg. Q
Think About the Problem in Steps
1. Find the initial Pmarket and Qmarket
2. Find the initial CS
3. Find the initial PS
4. Find the quantity after the ceiling
5. Find the final CS
6. Find the final PS
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingStart with Market Equilibrium
P
D
S
P*
CS
PS
Q* Q
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingWhere is the Price Ceiling?
P
D
S
P*
Q* Q
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingAdding the Price Ceiling
P
D
S
P*
Q* Q
price ceiling
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingGiven the Price Ceiling, What Happens to Quantities?
P
D
S
P*
Q* Q
price ceiling
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingPrice Ceilings Cause Shortages
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingFiguring Out the Difference
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
PSnew
CSnew
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingFiguring Out the Difference
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price CeilingFiguring Out the Difference
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS =
A + B + C• PS = D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS =
D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS =
A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A + B + D• PS =
F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from
producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is
D• Note that nobody gets C
or E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price ceiling
QS QD
shortage
A
F
C
D E
B
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A + B + D• PS = F
• Difference• ∆CS = (A + B + D)−
(A + B + C ) = D − C ,sign ambiguous
• ∆PS = F−(D+E +F ) =−(D + E ) < 0
• transfer from producers toconsumers is D
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Deadweight Loss
• Lost surplus from trades that fail to occur because of thepolicy
• Should be balanced against benefits from a policy
Admin RFH E CS and PS Price Regs Reg. Q
Give it a Try
QS = 2000P − 10000, QD = 20000− 1000P, price ceiling of $8
1. In market equilibrium, find
1.1 equilibrium price1.2 producer surplus1.3 consumer surplus
2. After the price ceiling, find
2.1 producer surplus2.2 consumer surplus2.3 transfer2.4 deadweight loss2.5 deadweight loss as a share of the transfer
Admin RFH E CS and PS Price Regs Reg. Q
Deadweight Loss and Elasticities
• Consider DWL size as a share of the transfer (D from ourpicture)
• Elasticities determine size of transfer and DWL
• Do we have a greater DWL in more or less elastic markets?
Admin RFH E CS and PS Price Regs Reg. Q
DWL Higher for More Elastic Demand and Supply
Admin RFH E CS and PS Price Regs Reg. Q
Impact of Price Floors
• Price floor ≡ regulated “lowest lawful price for good orservice”
• Generally rarer than price ceilings
• Examples?
• minimum wage• quite hard to come up with other good examples!
Admin RFH E CS and PS Price Regs Reg. Q
Impact of Price Floors
• Price floor ≡ regulated “lowest lawful price for good orservice”
• Generally rarer than price ceilings
• Examples?• minimum wage• quite hard to come up with other good examples!
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price FloorInitial Equilibrium, No Floor: Where Does Price Floor Go?
P
D
S
P*
Q* Q
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price FloorWhat Are QS and QD?
P
D
S
P*
Q* Q
price floor
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price FloorWhere is New PS and CS?
P
D
S
P*
Q* Q
price floor
surplusQD QS
Admin RFH E CS and PS Price Regs Reg. Q
Graphing Impact of a Price FloorNow, Compare to Old CS and PS
P
D
S
P*
Q* Q
price floor
surplus
CSnew
PSnew
QD QS
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS =
A + B + C• PS = D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS =
D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS =
A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A• PS =
B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from
consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is
B• Note that nobody gets C
or E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q* Q
price floor
surplus
A
F
CD EB
QD QS
• Before• CS = A + B + C• PS = D + E + F
• After• CS = A• PS = B + D + F
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS = (B + D + F )−(D + E + F ) = B − E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Two Types of Quantity Regulations
We just looked at regulations on price. Now we considerregulations on quantity.
1. Quota ≡ a regulated (almost always limited) “quantity of agood or service provided”
2. Government provision of a good or service (skip for timereasons)
Admin RFH E CS and PS Price Regs Reg. Q
Analyzing Quotas
• Now we explore the impact of a quota on price
• Give an example of a market with quotas
• See this White House report on the perils of occupationallicensing
Admin RFH E CS and PS Price Regs Reg. Q
Analyzing Quotas
• Now we explore the impact of a quota on price
• Give an example of a market with quotas
• See this White House report on the perils of occupationallicensing
Admin RFH E CS and PS Price Regs Reg. Q
Quotas in PicturesMarket Equilibrium: How Does Supply Change with a Quota?
P
D
S
P*
QQ*
Admin RFH E CS and PS Price Regs Reg. Q
Quotas in PicturesSupply with a Quota: What Happens to Price?
P
D
S
P*
Q
S’
Qnew Q*
Admin RFH E CS and PS Price Regs Reg. Q
Quotas in PicturesSupply with a Quota: What Happens to CS and PS?
P
D
S
P*
Q
S’
quota price
Qnew Q*
Admin RFH E CS and PS Price Regs Reg. Q
Quotas in PicturesSupply with a Quota: What Happens to CS and PS?
P
D
S
P*
Q
S’
quota price
Qnew
CSnew
PSnew
Q*
Admin RFH E CS and PS Price Regs Reg. Q
Quotas in PicturesFiguring Out the Differences
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS =
A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS =
D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS =
A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS =
B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from
consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is
B• Note that nobody gets C
or E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Figuring Out the Difference, Details
P
D
S
P*
Q
S’
quota price
Qnew
A
C
DE
B
Q*
• Before• CS = A + B + C• PS = D + E
• After• CS = A• PS = B + D
• Difference• ∆CS = A−(A+B+C ) =−(B + C ) < 0
• ∆PS =(B+D)−(D+E ) = B−E ,sign ambiguous
• transfer from consumersto producers is B
• Note that nobody gets Cor E after → trades thatdon’t take place →DWL = C + E
Admin RFH E CS and PS Price Regs Reg. Q
Recap of Today
1. Elasticity Reprise
2. Producer and Consumer Surplus• Definitions• Impact of a decrease in supply on surplus
3. Price Regulations• Price ceilings• Price floors
4. Quantity Regulations• Quotas
Admin RFH E CS and PS Price Regs Reg. Q
For Next Class
• Bring name tent
• Ripped from the Headlines
• Turn in Problem Set 2
• GLS Chapter 4