# ECON 200 Lecture Notes - Lecture 14: Influence Peddling, Price Ceiling, Price Floor

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11 Dec 2018
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11/13/18
ECON 200
Page !1
LECTURE OUTLINEā
1. Review: The effects of a price ceiling
2. The consequences of a price floor
3. Production and exchange
a. How do we gain by specializing in activities that we have comparative advantage in?
The graphical analysis: the joint production possibility frontier
4. Using the principal of Comparative Advantage to discuss a conventional wisdom
NON-PRICE COMPETITION, PRICE CEILINGā
-Bribing, influence peddling, corruption
-There is also ārationingā of the good in shortage where ācouponsā are issued to consumers, each
coupon giving the consumer the right to buy one unit of the good in shortage. Usually, a market
for coupons develops where some people establish businesses in purchasing and reselling the
couponsā¦
PRICE FLOORā
The consequences of a price floor (price support) in agriculture:
The market for wheat is \$3 per ton, but the producers are not happy with the price and are losing
income. In this case, the government sets the price floor at \$5 where a certain quantity Q will
produced at that dollar amount. Analyze the scenario as displayed by the graph:
Market for Wheatā
!
Price per ton
Quantity per
year (tons)
Supply
Demand
\$5
\$3
100
250
150
QD
QS
A
F
E
B
C
H
G
Q1
P1
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11/13/18
ECON 200
Page !2
PRICE FLOOR, continuedā
Producers are not happy with the priceāprice can fluctuateāand they can lose a lot of income
in a year. So, they lobby the government for price support. The government sets the price and the
amount of Q produced at that dollar amount.
Question:
When the price is \$5, how many units of wheat are exchanged/traded?
Surplusāthe difference between the 250 tons produced and the 100 tons traded
The surplus will be purchased by the government so that the price will stay there. If they
donāt buy the surplus, then the price will drop and price control will not last.
ādue to scarcity of resources
Price floorāat a certain price there is a surplus, but the price wants to go down, but doesnāt since
the government buys that surplus to maintain the control price
Graphical Analysis:
āLost gains from trade (dead weight loss) = area AEF on the graph (above)
āMarginal Cost = up the 100-ton line, from zero on the y-axis, until point āFā
āCost of excess goods produced = area HFBG on the graph (above)
āTotal cost = area contained by x-axis and supply curve, constrained by Q1 or 150 tons
āSurplus/total cost of production of excess good = 100-250, contained by supply curve
govāt uses tax payers income tax money to fund the surplus and price support, cost of the
govāt from the tax payers
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