Microecon 2-7-19 topic 6 PDF

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Principles of microeconomics notes from in class lecture...

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diamonds vs water why do we pay more for diamonds than for water? -the difference between surplus & marginal willingness to pay diamonds- hard to produce so marginal costs are high; people have few diamonds so the willingness to pay for the first diamonds is high water- water is easy to produce so the marginal costs are low; after the first drink of water which is necessary to survive, the value of the next several glasses is small so the marginal value is low efficiency & government interventions -sooo not being at equilibrium is inefficient; why would we ever not be there? -government interventions in the market may produce a quantity that is not Q* -if this happens then the government intervention decreases the efficiency of markets by lowering total surplus -deadweight loss provides a measure of how bad a government intervention is 2 types of interventions 1.) price ceilings & price floors (regulating the price in the market) 2.) taxes & subsidies what to do: slide 7 1.) draw the government intervention in the graph 2.) find the new price & quantity 3.) calculate DWL -depends on Q 4.) predict whether CS or PS increases or decreases (who wins / who loses) -depends on P price ceilings & price floors price ceiling- when the government sets a maximum price in the market -usually implemented to help consumers because the government believes the price determined by the market is too low -a price ceiling above the equilibrium, it doesn’t matter -if the market produces a price of 20, there is no effect of saying the price cannot be higher than 30 -nonbinding -at price P1: -quantity demanded is Q2 -quantity supplied is Q1 -so there is excess demand (shortage) -normally, prices would rise, but they cannot because of ceiling -new price is P1 & new quantity is Q1 /// Q2 is what’s wanted but cannot get what happens to total surplus? -quantity is shifted from Q* so there must be DWL

-DWL = C + E what happens to consumer surplus? -price is lower (good), quantity bought is lower (bad) -it is not clear whether consumer surplus increases, decreased, or stayed the same -consumer surplus is area A + B + C -but is now: A + B + D slide 12 what happens to producer surplus? -price is lower (bad), quantity sold is lower (bad) (((producer surplus will be lower))) -producer surplus is area D + E + F -but is now: F slide 13 price ceiling summary -if a price ceiling is binding (charges market quantity) -deadweight lost & inefficiency price floor- when the government sets a minimum price in the market -usually implemented to help producers because the government believes the price by the market is too low -price floor below the equilibrium price has no effect -at price P2: -quantity demanded is Q1 -quantity supplied is Q2 -so there is excess supply (surplus) -normally, prices would fall but they cannot (floor) -new price is P2 & new quantity is Q1 -only Q1 units are bought & sold what happens to total surplus? -the quantity is shifted away from Q*, so there is DWL -DWL = C + E what happens to consumer surplus? -consumers must have lower surplus because the price has increased (bad), & the quantity bought has decreased (bad) -consumer surplus is A + B + C -but is now: just A what happens to producer surplus -producers sell less (bad) but at higher prices (good) -producer surplus is D + E + F -but it now: B + D + Fq...