ECON111 Lecture Notes - Lecture 6: Marginal Utility, Demand Curve, Price Ceiling

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30 May 2018

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Week 6 Fairness and Government Intervention

Fairness

- Judge the rules

- Judge the results

- Ranking by fairness is the reverse of ranking by efficiency

The Big Tradeoff

- From a consequentialist perspective the fair results approach conflicts

efficiency and leads to the big trade off

- A trade between efficiency and fairness of making income transfers

- The tradeoff is between the size of the economic pie and the degree of

equality

Price Controls

- The price control is a government regulation that places an upper limit or

lower limit on the price of a particular good, service or factor of production

- This is done because the equilibrium is deemed unfair

- Non-binding price = legal price does not affect the market

Price Ceiling

- Price ceiling = legal maximum price

- Hard to say whether consumers are better off or worse off after a price cap

- Result not fair for consumers/blocks voluntary exchange (consequentialist will

say unfair)

- Increases search activity

- Not fair for producers at all (lower price and production)

- If the product is a necessity stated by the Human Rights then it is fair

(deontological will say fair)

Price Floor

- Price floor = legal minimum price

- E.g. labour markets (wages)

- Not efficient because of deadweight loss

- Surplus of labour is the same as a shortage of jobs

- Quantity traded is always the smaller number

- Producers (workers) as a whole may be better or worse off (depends if they

get a job)

- Not fair because not every worker is better off/ blocking voluntary exchange

(consequentialist)

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Document Summary

Ranking by fairness is the reverse of ranking by efficiency. From a consequentialist perspective the fair results approach conflicts efficiency and leads to the big trade off. A trade between efficiency and fairness of making income transfers. The tradeoff is between the size of the economic pie and the degree of equality. The price control is a government regulation that places an upper limit or lower limit on the price of a particular good, service or factor of production. This is done because the equilibrium is deemed unfair. Non-binding price = legal price does not affect the market. Hard to say whether consumers are better off or worse off after a price cap. Result not fair for consumers/blocks voluntary exchange (consequentialist will say unfair) Not fair for producers at all (lower price and production) If the product is a necessity stated by the human rights then it is fair (deontological will say fair)

Related Questions

21. The English word that comes from the Greek word for "one who manages a household" is

A- market
B- consumer
C- producer
D- economy

Question 22. 22. For a college student who wishes to calculate the true costs of going to college, the costs of room and board

A- should be counted in full, regardless of the costs of eating and sleeping elsewhere.
B- should be counted only to the extent that they are more expensive at college than elsewhere.
C- usually exceed the opportunity cost of going to college.
D- plus the cost of tuition, equals the opportunity cost of going to college.

Question 23. 23. The phenomenon of scarcity stems from the fact that

A- most economies' production methods are not very good.
B- in most economies, wealthy people consume disproportionate quantities of goods and services.
C- governments restrict the production of too many goods and services.
D- resources are limited.

Question 24. 24. Central planning refers to

A- markets guiding economic activity. Today many countries that had this system have abandoned it.
B- markets guiding economic activity. Today many countries that did not have this system have implemented it.
C- government guiding economic activity. Today many countries that had this system have abandoned it.
D- government guiding economic activity. Today many countries that did not have this system have implemented it.

Question 25. 25. Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that

A- we should agree with Senator Brown.
B- we should agree with Senator Johnson.
C- a good decision requires that we recognize both viewpoints.
D- there are no tradeoffs between equity and efficiency.

Question 26. 26. Max and Maddy charge people to park on their lawn while attending a nearby craft fair. At the current price of $10, seven people park on their lawn. If they raise the price to $15, they know that only five people will want to park on their lawn. Whether they have seven or five cars parked on their lawn does not affect their costs. From this information, it follows that

A- they should leave the price at $10.
B- it does not matter if they charge $10 or $15.
C- they would do better charging $15 than $10.
D- they should raise the price even more.

Question 27. 27. A circular flow diagram is a model that

A- helps to explain how participants in the economy interact with one another.
B- helps to explain how the economy is organized.
C- incorporates all aspects of the real economy.
D- Both (a) and (b) are correct.

Question 28. 28. In the markets for goods and services in the circular-flow diagram,

A- households provide firms with savings for investment.
B- households provide firms with labor, land, and capital.
C- firms provide households with output.
D- firms provide households with profit.

Question 29. 29. Incomes of U.S. households in the 1970s and 1980s

A- grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades.
B- grew rapidly, due to several increases in the minimum wage during those decades.
C- grew rapidly, due to government policies that discouraged the importation of foreign products during those decades.
D- grew slowly, due to the slow growth of the output of goods and services per hour of U.S. workers' time during those decades.

Question 30. 30. For economists, statements about the world are of two types:

A- assumptions and theories.
B- true statements and false statements.
C- specific statements and general statements.
D- positive statements and normative statements.

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ECON111 Lecture Notes - Lecture 6: Marginal Utility, Demand Curve, Price Ceiling

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