What Changes?
1. How is the Supply or Demand Curve Affected?
2. What happens to equilibrium price and quantity?
As the price of gasoline fell in the US during the 1990s,
more people bought large cars
When a local cable company offers cheaper pay-perview films, local movie theaters have more unfilled
seats
What Changes?
1. How is the Supply or Demand Curve Affected?
2. What happens to equilibrium price and quantity?
As technological innovation has lowered the cost of
recycling used paper, fresh paper made from recycled
stock is used more frequently
A salmonella outbreak is attributed to tainted tomatoes
Explain
When would the equilibrium price increase, but
equilibrium quantity may increase, decrease or
remain the same?
What happens when a market experiences both
an increase in the number of buyers and a
technological advance?
Explain
What is certainly true if demand and supply
increase at the same time?
What will happen in the market for an inferior
good if incomes rise and the number of
suppliers decline?
Problem
• Draw the market for parking spaces at
equilibrium at a price of $10 per spot
• Next, draw a line representing a price of $5
per spot.
• What is the result? Why?
Price and Quantity Controls
Modules 8 & 9
Price Controls
• Limits on how far prices can rise or fall; set by
governments or cartels
– Price ceilings: upper limit on price
– Price floor: lower limit on price
• In many cases, price controls prevent markets
from reaching equilibrium
Price Ceilings
• Fore example, some
cities place a price ceiling
on rental apartments
– This is often referred to as
“rent control”
– The purpose is to keep
rental units affordable for
low income earners
Rental Market at Equilibrium
Figure 8.1 The Market for Apartments in the Absence of Government Controls
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Price Ceiling Leads to Shortage
Figure 8.2 The Effects of a Price Ceiling
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Impacts of Price Ceilings
1. Persistent shortage of good
2. Misallocation of good
– Some who would pay more don’t get it
– Some who would not pay more do get it
3. Wasted resources
– Labor time spent hunting for good
Impacts of Price Ceilings
4. Inefficiently low
quality
– No incentive for
suppliers to improve
good
4. Black markets
– Good is bought and
sold illegally
Price Floors
• Agricultural products are
often subject to price
floors
– Often referred to as
“price supports”
– Purpose is to keep farms
profitable and sustain an
agricultural industry
Butter Market at Equilibrium
Figure 8.3 The Market for Butter in the Absence of Government Controls
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Price Floor Leads to Surplus
Figure 8.4 The Effects of a Price Floor
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Impacts of Price Floors
1. Persistent surplus of good
– But still sales less than without
2. Inefficient allocation of sales
– Some who would sell at lower
price can’t
– Some who could not sell at lower
price still sell
3. Wasted resources
– Governments often buy (or
destroy) surplus good
Impacts of Price Floors
4. Inefficiently high
quality
– Buyers would rather
have lower quality at
lower cost
4. Black markets
– Good is bought and
sold illegally
Quantity Controls
• Instead of limiting price, some policies aim at
limiting quantity
– Quotas: limit on amount of good that can be sold
• Often done through issuing licenses
• (e.g., liquor licenses)
Quotas
• For example, most cities put a
cap on the number of taxi cab
medallions (licenses)
– In effect, this limits the availability
of taxi cabs and thus the number
of possible rides
– This is often a money-making
scheme for cities
Taxi Ride Market at Equilibrium
Figure 9.1 The Market for Taxi Rides in the Absence of Government Controls
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Affects of Quota on Market
$6.00 = demand price
$4.00 = supply price
$2.00 = quota rent
Figure 9.2 Effect of a Quota on the Market for Taxi Rides
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers
Impacts of Quotas
1. “Wedge” or Quota Rent
– Spread between demand
price and supply price
2. Deadweight Loss
– Activity that would have
happened, but can’t
3. Black Market
– Buyers and seller see ways of
circumventing quota
So Why Do Controls Exist?
• Governments usually trying to accomplish
some public good
• Political considerations often preclude less
intrusive options
– e.g., rent control v. housing subsidies
• Policy makers don’t always understand
economics