o Total surplus = consumer surplus + producer surplus o Three Ways You Might (Unsuccessfully) Try to Increase Total Surplus o Reallocate consumption among consumers o Reallocate sales among sellers o Change the quantity traded
o Property rights- selling something that you actually own o Economic signal- price o Price Controls- if the government feels like prices aren’t fair then they may try and intervene o When does the government intervene? When enough people complain about prices o Price ceiling- an upper limit on prices o If set below equilibrium leads to shortages o If set above equilibrium no effect o How price ceilings cause inefficiencies Inefficiently low quantity Inefficient allocation to customers Wasted resources Inefficiently low quality Black markets o Winners and losers from rent control Producers lose, some lucky renters gain, some unlucky but not willing renters don’t get a place at all. o Black Markets- when some items are illegal to sell, the price ceiling is 0. o Why are there price ceilings- because we want price ceilings even though they have negative effects o Price floor- lower limit on prices o When set above equilibrium there’s a surplus (binding) o When set below equilibrium there’s no effect (non-binding) o How are they inefficient Dead weight loss from inefficiently low quantity Inefficient allocation of sales among sellers Wasted resources Inefficiently high quality Temptation to break the law by selling below the legal price o Quota- Controlling quantities- taxi medallions o Effect of a quota on the Market for taxi rides o The demand price is the price of a given quantity at which consumers will demand that quantity. o The supply price is the price of a given quantity at which producers will supply that quantity o The wedge, or Quoata rent, is the difference between the demand price and the supply price at the quota limit. Equal to the market price of the license when the license is traded. o Excise taxes are taxes on each unit of a good sold o Tax incidence - a measure of who really pays o When the price elasticity of demand is low and the price elasticity of supply is high , the burden falls mainly on consumers.
o When the price elasticity of demand is high and the price elasticity of supply is low , the burden falls mainly on producers. o Government needs money to do things that people want o Education, health care, roads, national security o The Laffer Curve o Art Laffer (1974)- Ronald Reagans economist o Justified tax cuts to increase revenue o Famous for “The Laffer Curve” o Cost of collecting taxes o People fill out tax returns o People (legally and illegally) hide income o Costs money to run the IRS o ADMINISTRATIVE COSTS o Elastic- wants o Deadweight loss is larger o Inelastic needs (gas, medicine) o Deadweight loss is lower o Taxes should choose goods with the lowest price elasticities Lesson 5 o Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price o DEMAND ELASTICITY o Inelastic- elastic demand is LESS THEN 1 When a demand is inelastic the price effect dominates the quantity effect Increase in price causes a slight reduction in the quantity demanded
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