Chapter 1: What is economics?
Chapter 2: What is a social science/how do research and statistics work?
Chapter 3: What are demand and supply curves?
Chapter 4: We describe demand and supply curves
Chapter 5: We apply demand and supply curves
STUDY ECONOMICS! Your Marks depend on it!
If you hit the ground running, you will do well!
It really doesn't matter how you study as long as you understand the material.
Okay!
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Examples/Applications of supply and demand
-Interaction among markets
-Government controlled prices
-Market Efficiency
INTERACTION AMONG MARKETS
-Basically, changes in one market will affect other markets. There is also a degree of feedback, so changes in a market can cause it to change again.
For an example, if a technology develops which makes it much cheaper and faster to extract oil, the supply of oil will move to the right (oil's supply will rise). This in turn causes all markets which use oil as an input (such as plastics or transportation) in turn to experience and increase in supply. At the same time, as supply of oil increases, equilibrium price of oil will fall, which in turn will effect the demand of oil substitutes such as natural gas or wind power.... you get the point?
There are two ways of looking at markets
PARTIAL EQUILIBRIUM- analysis of a market in isolation (other markets aren't taken into account)
GENERAL EQUILIBRIUM- All of the markets are taken into account
In this course, we are considering markets almost exclusively from a partial equilibrium standpoint.
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GOVERNMENT CONTROLLED PRICES
When the price is in disequilibrium, the ACTUAL AMOUNT exchanged is always the LESSER/SMALLER of the quantity supply or the quantity demanded. This is the small numbers rule!
PRICE FLOORS: A minimum price. Prices are not allowed to fall below a set amount.
They have no effect UNLESS they are set above the equilibrium price. Otherwise, the market will simply fall into equilibrium, like it regularly does.
A binding price floor creates an excess supply!
PRICE CEILING: A maximum price. Prices are not allowed to rise above a set amount.
They have no effect unless UNLESS they are set below the equilibrium price.
In most cases with price ceilings, a shortage is created (an excess of demand). Those who are able to get their hands on the product get it for a cheap price, but everyone else is simply denied the product.
IF YOU SCREW WITH MARKETS, THERE IS ALWAYS A COST! DUN DUN DUN...
Basically, if price controls prevent markets from allocating goods, other allocation methods will spring up.
-Black Markets (illegal markets in which black marketeers buy products at controlled prices, and then sell them at the prices which consumers are willing to pay for them, making personal and illegal profits off of the difference)
-First come, first served (so people will cue up to get products. Think UBC BBQs)
-Rationing (the government decides how much each consumer gets to purchase. This happens during wars usually)
-Seller Preferences (Under the counter deals for favorite customers or family)
Okay!
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RENT CONTROL
(otherwise known as an effective price ceiling)
Basically, supply is inelastic in the short run, because it takes time to build new apartments, or to let existing apartments go to ruins.
Rent controls cause excess demand equal to the difference between the quantity which would actually be demanded at the rent control price (a large quantity. if pricing is cheap, people want more of it) and the quantity supplied at that price range. This may not be a large excess of demand initially, but as time passes and the housing market becomes more elastic, buildings will not be kept up, and as a result, they will become uninhabitable. This means that supply will actually decrease over time, creating a larger excess of demand (housing shortage).
The moral of the story: Those who get tenancy before the price controls are adopted WIN, because they have cheap rent forever (but on the other hand, their building may not be kept well if the owner is making a loss on it due to artificially cheapened rent). Landlords and prospective future tenants both lose. Landlords lose because they don't get the expected returns on their investment in real estate, and potential tenants lose because there aren't enough available buildings for them to find a place to rent from.
As a result...
-Black Market (This is the rent... and then you also have to pay a $1600 key deposit. HAHAHAHA)
-First come first served
-Rationing
-Seller preference (I only rent to my relatives)
MINIMUM WAGES
these are effective price floors for labor. They create an excess of supplied labor, which is otherwise known as unemployment.
The moral: Workers who can keep their jobs win (but not entirely, because they will be expected to perform the duties normally performed by a slightly larger staff). Producers and prospective employees lose. Producers have to pay more, and potential employees can't find a job.
ALTERNATIVES TO PRICE CONTROLS
1: Let the market work
2:
-Subsidized housing
-Public housing
-Income assistance
in other words, just directly give people the money. These are nonmarket solutions. They do not, however, change the fact that opportunity cost for certain goods (such as houses) is high.
How do you balance everything off? There are benefits and downfalls to every scenario where prices are controlled. Do the benefits to those who receive them outweigh the costs to those who incur them in every price control scenario? How do we figure this all out?
MARKET EFFICIENCY: Let's us see if the market is maximizing social welfare.
In order to understand market efficiency, we first need to come to a new understanding of supply and demand. Basically, we morph the demand curve into a benefit curve, and the supply curve into a cost curve.
DEMAND is the maximum price a consumer is willing to pay for any given quantity. If there is less supplied, the consumer is willing to pay more.
in this sense, MAXIMUM PRICE = value, or benefit to you, the consumer.
SUPPLY is the minimum price a producer is willing to accept for the sale of a good. The less they are selling, the less they are willing to sell for.
ECONOMIC SURPLUS = BENEFIT - COST
Let's say I am willing to buy a can of coke for $1, and a company is willing to sell it for ten cents! Well... then basically, when we buy and sell at equilibrium price, the consumers are getting bonus profit, and consumers are getting a lower price than the maximum they are willing to pay, so there is an economic surplus spread through the market to both consumers and producers. The dollar amount of this surplus can be determined by finding the area of the triangle which represents the surplus on a market graph.
The producer surplus is the part of the triangle above the equilibrium price point
The consumer surplus is the part of the triangle below the equilibrium price point
Economic surplus is FREE HAPPINESS!
We don't want to cut that surplus, because that creates losses... however some create total losses, but net benefits for either producers or suppliers
PRICE CEILINGS create losses in the producer surplus, losses in the total surplus, and increases in the consumer surplus.
PRICE FLOORS create losses in the consumer surplus, losses in the total surplus, and increases in the producer surplus.
The chunk which is taken out of the triangle (to the right of the price control quantity exchanged) represents the net loss in economic surplus. That is the cost of intervention.
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