Hokay!
Farmers basically experience two kinds of problems which make their lives miserables.
THE LONG TERM PROBLEM is that farmer's incomes fall, relative to the incomes of urban workers. There are three reasons for this.
1: Increasing domestic supply: as time moves on and technologies improve in farming, the domestic supply of farmed products shifts to the right (increases). This wouldn't be necessarily such a bad thing if demand would also shift to the right... however...
2: The is a lagging domestic demand for farm products: Because farm products are necessities (food), they have low income elasticity. As such, increases in income do not cause consumers to purchase much more farm products.
also
3: The is a decreased demand for exported farm goods: There is less of a demand now for Canadian farm products on the global market because countries which we have sold to in the past now produce their own farmed goods domestically.
So basically, demand for farm products remains relatively stagnant, while the supply of farm products increases. This means that the price of farm products inevitally drops, as do farmer incomes.
AGRICULTURE SUPPORT: RAISING INCOME
Government argicultural policy often aims to raise farmer's incomes above what they would make selling goods at equilibrium prices (in addition to stabilizing incomes).
There are two ways to maintain an effective price floor above the equilibrium price
1: PRICE SUPPORT
In price support, the government legislates an effectual price floor, by buying all of a farmer's output at a set price higher than the equilibrium price. By doing this, the government creates a situation where demand is perfectly elastic (and prices will not change regardless of quantity supplied).
The price and quantity exchanged both rise from the orginal equilibrium level. There is, however, an excess in supply (the farmers produce more than customers will actually buy at that set price). Excess supply is stockpiled each year.
The government is subidizing an amount equal to (the artificially inflated price) X (The excess in demand)
The consumer is subsidizing an amount equal to (quantity demanded at inflated prices) X (The difference between the equilibrium price, and the inflated price)
BASICALLY, this method allows farmers to make more money by rellocating money from the consumer and from the taxpayer.
2: QUOTAS
In a quota scenario, the government sets a limit on the quantity of a farm good that is supplied (like a quantity wall). The quota quantity is less than the equilibrium quantity, and as such, the price at the quota quantity is higher than the equilibrium price.
The effect is that quota holders get extra revenue equal to (the difference between the price demanded at the quota quantity and the price supplied at quota quantities)
Because demand is inelastic if for whatever reason quantity falls, farmer's total renevues increase! And quantity cannot rise above the quota level.
Pe X Qe < Pq X Qq BECAUSE OF INELASTIC DEMAND
Advantages: Farmer's income is stabilized without stockpiling
Disadvantages: The consumer pays more for less, and the cost of purchasing quota rights effectually allows quota licenses to become a market in and of themselves.
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THE SHORT TERM PROBLEM is that the prices of farm products fluctuate tremendously, and as a result, the farmer has a difficult time securing a steady income. These fluctuations can happen on a few levels.
INTERNATION MARKETS- changes in world prices cause changes in export prices. When the world market goes up or down, farmers make more or less money off of exports.
Basically, the demand in the world market is perfectly elastic, because Canada's contributions to international farm product markets are so small, they are practically insignificant. As a result, whatever quantities Canadian producers put on the international market do not affect the price determined for the product. FARMERS HAVE NO CONTROL OVER FLUCTUATIONS IN WORLD PRICE. Because prices are uncontrollable, farmers incomes increase in the same direction as supply (if the weather is good for some reason and a large crop is harvested, they make more money) and vice versa. Farmer incomes also increase when world prices arbitrarily rise, and fall when world prices fall.
The big complaint for farmers is that they have very little control over their incomes due to these uncontrollable changes in both the world market and their own supply. As a result, the government will often step in and try and fix things.
STABILIZATION POLICIES FOR INTERNATIONAL MARKETS (in order to adjust for fluctuations)
1: Stabilize Quantity!
How? Stockpile farm products when there are too many being produced (a good year), and then dip into this stockpile when there is not enough being produced (a bad year)
Problems: This won't work for perishable items, and also, there are extra costs farmers will have to pay to stockpile their products.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
2: Stabilize Price!
How? Create a system of 'guarunteed price' where the government subsidizes farmers when world prices are too low, and farmers pay the government when the prices are too high.
Major Problem: How do you determine what prices are too high and which are too low? If the government sets the 'ideal' price at a rate which does not correspond to acceptable world prices, either the government or the farmers will be getting a bad deal.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
DOMESTIC MARKETS- Basically, supply is inelastic from year to year (farmers can't substitute inputs and change production mid-growing season without much difficulty), and unplanned changes can occur to this inelastic supply due to changes in weather or other uncontrollable factors.
Domestic demand for farm products is very inelastic (there isn't a whole lot of substitution people can make for food). Because price is so inelastic, farmers can ACTUALLY LOSE OVERALL PROFIT by supplied a LARGER QUANTITY THAN EXPECTED (because, remember, total revenue is price X quantity, and for inelastic demand, total revenue increases when you lower quantity exchanged and increase the price). In other words, farmers incomes will fluctuate in the same direction as the price, and in the opposite direction to supply (the higher the price of wheat, the more money wheat farmers will make), and exogenous factors can raise or lower the price of wheat (by changing the quantity supplied)
HOKAY! Farmers hate this because again, they have no control over their own incomes.
THIS IS WHAT THE GOVERNMENT DOES!
1: Stabilize Quantity!
How? Stockpile farm products when there are too many being produced (a good year), and then dip into this stockpile when there is not enough being produced (a bad year)
Problems: This won't work for perishable items, and also, there are extra costs farmers will have to pay to stockpile their products.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
2: Stabilize Price!
How? Create a system of 'guarunteed price' where the government subsidizes farmers when world prices are too low, and farmers pay the government when the prices are too high.
Major Problem: How do you determine a good average price? Also, farm income will still vary with the quantity supplied.
GATEMAN'S AWESOME SUGGESTION: Why not just save extra money made during good years and borrow money lost during bad years (like the rest of us)
3: Suggestions for income stabilization in domestic markets:
-With too little government intervention, farmer incomes will vary inversely with supply. (The artificial demand curve is too inelastic)
-With too much government intervention, farmer incomes will vary directly with supply. (The artificial demand curve is too elastic)
-So in order to be most effective, the government tries to intervene in an intermediate fashion by providing unit elasticity. In other words, the government's 'guaranteed' price for farm products will vary in an inverse proportion to the quantity.
FOR EXAMPLE: If output rises 10%, the government allows the 'guaranteed price' to fall 10%, so total revenue remains unchanged.
Agricultural Policies in CANADA:
1: DIFFERENT KINDS OF MARKETING BOARDS
a) Supply Management (which is a marketing board)
-sets quotas
-used for milk, eggs, cheese, butter, and poultry
-they are provincial bodies
-they allow for huge profits for farmers... at the expense of the consumer
-Food processor (who buy farm products as inputs) also incur high costs
-In 1995, the quotas were replaced tariff equivalents in order to conform with the World Trade Organization. The tariffs were set as high at 300% though, so our farmers are still making a lot of money
b) Marketing Agents
-The Canadian Wheat Board in an example of this
-Every farmer is required to sell all of their wheat to the Canadian wheat board
-The wheat board pays the farmer the world price for their wheat
2: INCOME SUPPLEMENTS
"Farm safety net programs"
-Crop failure insurance
-Income stabilization
-Bailouts
Farms are pretty big businesses... small farmers are pretty much a thing of the past. =(
ISN'T IT DEPRESSING!?
Showing posts with label Price Controls. Show all posts
Showing posts with label Price Controls. Show all posts
ECON 101 - Markets in Action
Important Announcement: The Midterm is one week away! Here's a quick review of what we've been doing.
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!
--------------------
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.
----------------------------------
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!
-----------
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.
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!
--------------------
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.
----------------------------------
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!
-----------
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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