04_Applications..

04_Applications.. - Applications & Extensions of Supply...

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1 Applications & Extensions of Supply & Demand (Section 4) I. Links between inputs (resource) and Product market Unless otherwise stated assume all markets in equilibrium A. Example 1 (Assume markets are in equilibrium) Let’s examine two markets, the market for steel & the market for cars (which use steel) Graphs : 1. Suppose cell phones companies start using steel to make cell phones, show how this impacts each market. 2. Suppose terrorists blow up a bunch of steel mines all over the world, show how this impacts each market. 3. Suppose it is reported that you will live to 120 (healthy as an ox) if you never step foot in a car and walk everywhere.
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2 B. Example 2 Product market is fast food hamburgers and the input market is low skilled workers (both in Pocatello) Graphs : 1. Suppose a new factory moves to town. 2. Suppose fast food hamburgers are found to be healthy for you.
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3 II. Price controls A. Price ceilings 1. Analysis of a price ceiling Price ceiling - A legally established maximum price sellers can charge for a good or resource (highest price buyers can buy something for) A graph of a binding price ceiling : - What happens? - What happens if a price ceiling is above the equilibrium price?
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4 1. Price ceiling producers’ surplus consumers’ surplus and deadweight loss (assume for simplicity that world is only in $ increments) Numerical Example : (shoveling) Demanders (Homeowners) Suppliers (Shovelers) Name Most they will be willing to pay Name Least they will be willing to do it for Andrew $10 Tim $10 T.J. $11 Manu $11 Mike $12 Tony $12 Toni $13 BSB $13 Jiri $14 Bruce $14 Joe $15 Nazr $15 Desmond $16 Brent $16 What is the market equilibrium? What is the consumer surplus and producer surplus at the market equilibrium?
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5 To help out homeowners the government imposes a price ceiling of $11. What happens? What happens to consumer surplus & producer surplus? Graph this (assume linearity i.e. ignore step functional form):
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6 A graph without numbers Note: Deadweight Loss (DWL) is the loss in welfare (usually versus social optimal… or some other situation)
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7 2. Examples of price ceilings
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8 B. Price Floor Price floor - A legally established minimum price buyers must pay for a good or resource (lowest sellers can sell it for) - What happens? Two ways to support a price floor: 1. Government buys surplus Example in the real world: Graph price floor in agricultural market:
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9 2. Just impose it Example in real world? Graph: Who wins? Why? Why might these “wins” not be as large as they appear? Who loses? What happens in the real world? - What happens if a price floor is below the equilibrium price?
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10 1. Price floor, producers’ surplus, consumers’ surplus, and deadweight loss Numerical Example : (shoveling) Demanders (Homeowners) Suppliers (Shovelers) Name Most they will be willing to pay Name Least they will be willing to do it for Andrew $10 Tim $10 T.J. $11 Manu $11 Mike $12 Tony $12 Toni $13 BSB $13 Jiri $14 Bruce $14 Joe $15 Nazr $15 Desmond
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04_Applications.. - Applications & Extensions of Supply...

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