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Chapter 4
Market Equilibrium
and Elasticity
Price Controls
Legal restrictions on how high or low a
market price may go
 Price Ceiling:

– limiting price (on consumer goods to
protect consumers welfare)
– maximum price a seller can charge

Price Floor:
– support price (on production factors, e.g.
labor)
– minimum price a buyer is required to pay
Example: Price Ceiling
The Effects of a Price Ceiling
Example: Rent Controls
Figure 3.8,P.70
Example: Assumed Price Controls
in the Pizza Market
Figure 3.9
Problems with Price Ceilings
Shortages
 Inefficiencies

– misallocation to consumers
– wasted resources
– low quality

black markets.
Example: Price Floor
The Effects of a Price Floor
Problems with Price Floors
Surplus
 Inefficiencies

– misallocation of sales among sellers
– Wasted resources
– Inefficiently high quality

Illegal activity
Price Controls cause Inefficiency
Consumer surplus
 Producer surplus
 Total surplus
 Deadweight loss

Recall: Demand--the definition
The quantity of a good or service
consumers’ are willing and able to buy
at various prices
 The maximum price the consumer is
willing and able to pay for the next unit
of the good or service.

Two Different Prices
The maximum price
the consumers are willing to pay
for
Vs.
The market price
the consumers actually paid for
Consumer Surplus

Individual consumer surplus
– the net gain to an individual buyer from the
purchase of a good.
– equal to the difference between the
buyer’s willingness to pay and the price
paid.
Consumer Surplus
Consumer Surplus
The total consumer surplus generated by purchases of a good at a
given price is equal to the area below the demand curve but
above that price.
A Fall in the Market Price Increases
Consumer
Surplus
Consumer
Surplus
Recall: Supply--the definition

The quantity of a good or service
producers are willing and able to sell at
various prices

The minimum price the producer is
willing and able to accept for providing
the next unit of the good or service
Two Different Prices
The minimum price
the producers are willing to
accept
Vs.
The market price
the producers actually get
Producer Surplus and the Supply Curve

Individual producer surplus
the net gain to a seller from selling a good
equal to the difference between the price
received and the seller’s cost (the minimum
price the producer is willing to accept)

Total producer surplus
the sum of the individual producer surpluses
of all the sellers of a good
Producer Surplus
Producer Surplus
The total producer surplus from sales of a good at a given price is
the area above the supply curve but below that price.
A Rise in Price Increases Producer
Surplus
Putting it together: Total Surplus
the total net gain to consumers and
producers from trading in the market
 the sum of the producer surplus and the
consumer surplus

Pf
Pc
Total Surplus
Determination of Price and Quantities
D & S together determines P
 P determines Qd and Qs

– Increase in D
What happens to
– Decrease in D
Equilibrium price
– Increase in S
And
– Decrease in S
Equilibrium quantity?
– Increase in D and S
– Decrease in D and S
– Increase in D and decrease in S
– Decrease in D and increase in S
Recall: factors affecting D

price of related goods
– complements vs. substitutes
income: normal vs. inferior
 preference
 expectations (prices, income, …)
 population
 others

Recall: factors affecting S
 prices
of inputs
– goods used to produce other goods
 price
of related goods
– goods that use the same resources
 technology
 expectations
 others
The Effect on the Market

for Tennis Balls
of
a Decline in
Court-Rental
Fees
(change in
price of a
related good complements )
Figure 3.11
Figure 3.13
The Effect of a Federal Pay Raise

on the Rent
for
Conveniently
Located
Apartments in
Washington,
DC
(change in
income)
The Effect on the Market

for Overnight
Letter Delivery of
a Decline in the
Price of Internet
Access
(change in price
of a related good
- substitute)
Figure 3.12
Rules Governing the Effects of
Demand Shifts
Figure 3.17A & B
Exercise 3.4, P.75

How will a decline in airfare affect
– Intercity bus fare
– Price of hotel rooms in resort communities

Why?
The Effect on the Market

for New Houses
of a Decline in
Carpenters’
Wage Rates
(change in price
of an input)
Figure 3.15
The Effect of Technical Change on the
Figure 3.16
Market

for TermPaper
Revisions
(change in
technology)
The Effect on the Skateboard Market
Figure 3.14

The Effect on
the Skateboard
Market of
an Increase in
the Price of
Fiberglass
(change in
price of an
input)
Rules Governing the Effects of
Figure 3.17C & D
Supply Shifts
(continued)
The Effects of Simultaneous Shifts
Figure 3.18
in Supply and Demand
1.
Researchers prove that the oils in which tortilla chips are fried are
harmful to human health
2.
The price of corn harvesting equipment falls
The Effects of Extra Border Patrols
on the Market for Illicit Drugs
Figure 4.1
Equilibrium and
Shifts of the Demand Curve
Equilibrium and
Shifts of the Supply Curve
Simultaneous Shifts of
the Demand and Supply Curves