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
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LECTURE OUTLINE
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 CEILING
-Bribing, influence peddling, corruption
-There is also “rationing” of the good in shortage where “coupons” 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
coupons…
PRICE FLOOR—
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 Wheat
!
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, continued—
Producers are not happy with the price—price can fluctuate—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?
Answer: 100 units
Surplus—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
don’t buy the surplus, then the price will drop and price control will not last.
—due to scarcity of resources
Price floor—at a certain price there is a surplus, but the price wants to go down, but doesn’t since
the government buys that surplus to maintain the control price
Graphical Analysis:
—Lost gains from trade (dead weight loss) = area AEF on the graph (above)
—Marginal Cost = up the 100-ton line, from zero on the y-axis, until point ‘F’
—Cost of excess goods produced = area HFBG on the graph (above)
—Total cost = area contained by x-axis and supply curve, constrained by Q1 or 150 tons
—Surplus/total cost of production of excess good = 100-250, contained by supply curve
gov’t uses tax payers income tax money to fund the surplus and price support, cost of the
gov’t from the tax payers
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