ECON 0100 Lecture Notes - Lecture 4: Price Ceiling, Economic Equilibrium

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5 Jun 2018

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Marginal Analysis

Used when making a "how much" type of decision

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Examples

How many hours to work

How many workers to hire

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When using marginal analysis, we consider two things:

Marginal Benefit

The additional benefit from consuming one more unit

□

Marginal Cost

The additional cost from consuming one more unit

□

○

•

Marginal Analysis Rule

In applying marginal analysis, we determine the optimal quantity occurs at the point

where MB = MC

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In discrete (not continuous) cases, it is instead the largest quantity such that MB ≥ MC

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•

Example Problem

A firm is deciding the optimal number of workers to higher in the short run. Each

worker is paid $7.50 an hour. The first has determined that their revenue per hour

associated for a given number of workers is the following:

○

Number of

Workers

Total

Revenue

Marginal

Revenue

Marginal

Cost

$14

$26

$36

$44

$50

$54

•

Consumer Choice

For simplicity, we will consider the case of 2 types of goods.

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Consumer Problem: Given a fixed budget, how many of each good should I buy?

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For consumer, the enjoyment derived from consuming a given combination of goods

and services is called utility.

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Marginal Utility of good X (MUX) means the additional utility of consuming one more

unit of good X.

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Typically, consumers exhibit diminishing marginal utility.

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•

In examples where it is only possible to consume fractional units of a good, optimal

consumption occurs at the point where:

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Example Problem

Suppose you are at a local pub with a budget of $20 for the night and want to drink

beer and eat pizza. Assume pizza is $2 a slice and beer is $2 a bottle. If your utility for

pizza and beer is the following, how much of each good will you buy?

○

Number

Of Beers

Utility

From Beer

MU from

Beer

MUBeer

PriceBeer

Slices of

Beer

Utility

From Pizza

MU from

Pizza

MUPizza

PricePizza

420

300

700

480

860

600

920

680

960

748

990

808

1012

862

Thus, the optimal consumption level in this case is:

○

•

REVIEW

Price for Trade

Example 1

Let's consider 2 farmers, Alice and Bob. They both can produce milk and wheat.

Alice can produce 30 milk or 10 wheat.

Bob can produce 20 milk or 40 wheat.

Find a set of possible prices for trade.

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•

Example 2

Let's consider 2 countries, the US and Japan. They both can produce laptops and

cars.

US can produce 30 laptops or 50 cars.

Japan can produce 20 laptops or 20 cars.

Find a set of possible prices for trade.

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Practice Questions about Demand, Quantity Demanded, Supply, and Quantity Supplied

What happens with the demand if the price for a good goes up?

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Let us consider the market for wild salmon. For each of the following scenarios draw

the initial supply and demand curves and identify what will happen to the demand,

supply, price, and quantity.

○

•

Double Shift of Demand and Supply

The Key Rule: When two curves shift, you can find the change ONLY for ONE variable.

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Price Ceiling & The Effects on CS, PS, & DWL

•

Use marginal analysis to

determine how many workers

this firm should hire.

New research shows some

unexpected benefits for health

of eating the wild salmon.

The price for farmed salmon

goes up.

The trade union of sailors

increased the minimum wage

companies should pay for

workers.

The price for wild salmon goes

down.

The government established

some quota on the amount of

wild salmon could be caught

There is a boom in the

economy and the average

income increased.

Income increase,

Price of key input increase

Preferences increase,

New technology

Price for substitute decrease,

Number of producers increase

Preferences decrease,

Producers expect higher

prices in future

Let's consider a market with the following

demand and supply curves:

QD = 100-5P QS = 10P - 50

Find the equilibrium price, quantity, CS, PS, TS

Let's consider a market with the following

demand and supply curves:

QD = 100-5P QS = 10P - 50

Now, let's assume there is a price ceiling at the

level of $8

Find the equilibrium price, quantity, CS, PS, TS

Lecture 4

Saturday,+May+26,+2018

3:10+PM

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Related Questions

Who bears the primary costs of a rent control program?

landlords

renters that get rent-controlled apartments

taxpayers

the wealthy

Assume the demand for sushi is Qd = 180 - 3P, where Qd is quantity demanded and P = price in dollars. The supply of sushi is Qs = 80 + 5P, where Qs is quantity supplied (and P is, again, price in dollars). A price of $20 would result in:

	A.	Excess supply of 60
	B.	Excess supply of 120
	C.	Excess supply of 140
	D.	Excess demand of 140

US agricultural price supports are politically popular because

They have no adverse impacts

The US would have food shortages without them

The benefits accrue to a large number of voters and the costs are paid by a small number of voters

The costs are spread out among millions of people

	A.	$15.50
	B.	$12.50
	C.	$10
	D.	$15

Price floors and ceiling prices:

cause the supply and demand curves to shift until equilibrium is established.

both cause surpluses.

interfere with the rationing function of prices.

A change in the price of a good leads to a change in ________, which leads to a ___________

quantity supplied; shift of the supply curve

supply; shift of the supply curve

quantity supplied; movement along the supply curve

When the supply of a product increases, this implies that

the price of the product first declined

more will be purchased at the same price

producers will be willing to accept a lower price for each unit sold

demand for the good must have increased

producers will offer less for sale at each possible price

If there is a excess demand for product X:

fewer resources will be allocated to the production of this good.

the price of the product will rise.

the supply curve will shift to the left and the demand curve to the right, eliminating the shortage.

the price of the product will decline.

Which of the following will occur when there is a simultaneous decrease in demand and a decrease in supply?

B and D both necessarily occur

An increase in equilibrium quantity

A and C both necessarily occur

An increase in price

A and D both necessarily occur

A decrease in price

A decrease in equilibrium quantity

Velcro is becoming more and more popular for a variety of uses, including as fasteners for shoes. What should happen to the equilibrium price and quantity for shoelaces as a result?

Both price and quantity should decrease.

Price should increase and quantity decrease.

Both price and quantity should increase.

Price should decrease and quantity increase.

Nothing.

If the government imposes a ceiling price on apartment rents, we would expect to observe all of the following except one. Which is the exception?

	A.	conversion of some apartment complexes to condos
	B.	a shortage
	C.	an increase in the number of new apartment complexes being built
	D.	lower maintenance of existing apartments
	E.	long waiting lists for apartment seekers

supply; movement along the supply curve

both cause shortages.

chocolatebadger640

1. Select the scenarios that result in lower prices if they were to occur in isolation?

a. Higher technology, fall in the price of a substitute, decrease in the price of a complement

b. Higher productivity, lower taxes on corporations, lower expected future prices

c. Higher income for inferior goods, higher subsidies for firms, increase in tastes and preferences

d. Lower costs of production, fall in the price of substitute, reduction in consumer subsidies

2. If the price of substitute increased the result would be __________ prices, and we would say__________

a. an increase in prices, quantity demanded increased

b. an increase in prices, demand increased

c. a decrease in prices, demand decreased

d. a decrease in prices, supply increased

3. Consumers can make costly mistakes when not enough information is available. Which of the following represents a market solution to obtaining costly information?

a. Franchises

b. Advertising

c. Third party verification

d. All of the above

The market for coffee is initially in equilibrium with supply and demand curves of the usual shape. Pepsi is a substitute for coffee; cream is a complement for coffee. The following questions concern the market for coffee.

Assume that all ceteris paribus assumptions continue to hold except for the event(s) listed. Answer each question without considering the others.

1. Coffee is a normal good. A decrease in income will:

(i) increase the price of coffee and increase the quantity demanded of coffee.

(ii) increase the price of coffee and increase the quantity supplied of coffee.

(iii) decrease the price of coffee and decrease the quantity demanded of coffee.

(iv) decrease the price of coffee and decrease the quantity supplied of coffee.

(v) cause none of the above.