Students and Shortages
By Cliff Nelson
December 2015
Two Areas of Focus
1) Students. Teaching techniques and tips to
more effectively teach students.
2) Shortages. Economic principles that
illuminate the economics that we teach as
well as phenomena we observe in our daily
lives.
Students
A minor deduction of points can carry much
weight.
Students
A minor deduction of points can carry much
weight.
On my tests:
“Deduction for work done in pen or for work
that is hard to follow:_______ (up to 2
points)”
Phrases
• Zero behind is undefined. 8/0 = undefined.
Phrases
• Zero behind is undefined. 8/0 = undefined.
• Hop the line, flip the sign.
Phrases
• Zero behind is undefined. 8/0 = undefined.
• Hop the line, flip the sign.
• Add to y, go high. Add to x, go west.
Phrases
• Zero behind is undefined. 8/0 = undefined.
• Hop the line, flip the sign.
• Add to y, go high. Add to x, go west.
• OAOAHH
HHAOAO
The Skeleton of a Function
The skeleton of
is
.
The Skeleton of a Function
The skeleton of
is
Example:
.
The Skeleton of a Function
The skeleton of
is
Example:
Example: Given
.
Assigning Problems
• Assign problems ending in 1,5, or 9.
• Example: 1-31(1,5,9) means
1,5,9,11,15,19,21,25,29,31.
Efficient Grading
• Most problems are worth 2 points.
• -1 point for a minor mistake.
• -2 points for a major mistake or for more than
one minor mistake.
• Longer problems can be broken down into
components worth 2 points each.
Rational Expressions Creation Formula
Rational Expressions Creation Formula
• Step 1: Pick any numbers for p, q, r, and b.
• Step 2: Simplify the formula a=[(q-p)/(r-q)]b
• Step 3: Plug in the values of the variables into
the left side of the equation at the top.
Rational Expression Example
Pick p = 5, q = -1, and r = 8.
Rational Expression Example
Pick p = 5, q = -1, and r = 8.
Pick b = 3. Then a = -2.
Rational Expression Example
Pick p = 5, q = -1, and r = 8.
Pick b = 3. Then a = -2.
Rational Expression Example
Pick p = 5, q = -1, and r = 8.
Pick b = 3. Then a = -2.
Shortages
Demand Function (in millions of units):
Supply Function (in millions of units):
p = price per unit Q = quantity in millions
Shortages
Demand Function (in millions of units):
Supply Function (in millions of units):
p = price per unit Q = quantity in millions
Q
p
Equilibrium Point: (4,6)
Equilibrium Point: (4,6)
At $4 per unit, 6 million units will be both supplied and demanded.
Equilibrium Point: (4,6)
Q
6
(4,6)
p
4
Economics Classes:
Economics Classes:
p
Q
Economics Classes:
p
4
Q
6
Which Variable is Dependent?
Which Variable is Dependent?
• Quantity depends on price but price also
depends on quantity.
Which Variable is Dependent?
• Quantity depends on price but price also
depends on quantity.
• The more scarce the material, the higher the
price (e.g. gold versus iron ore)
Why Do Markets Gravitate toward the
Equilibrium Point?
Why Do Markets Gravitate toward the
Equilibrium Point?
• If the price is higher, a surplus will result.
Why Do Markets Gravitate toward the
Equilibrium Point?
• If the price is higher, a surplus will result.
• If the price is lower, a shortage will result.
Why Do Markets Gravitate toward the
Equilibrium Point?
• If the price is higher, a surplus will result.
• If the price is lower, a shortage will result.
• Market participants, pursuing their own selfinterest, will naturally bring supply and
demand into equilibrium.
Suppose the price is at $5 per unit.
Suppose the price is at $5 per unit.
p
5
4
Supply:
Surplus: 7.5 – 4 = 3.5
Demand:
Q
4
6
7.5
Suppose the price is at $5 per unit.
7.5 million units will be supplied but only 4
million units will be demanded. This results in
a 3.5 million unit surplus.
p
5
4
Supply:
Surplus: 7.5 – 4 = 3.5
Demand:
Q
4
6
7.5
Suppose the price is at $3 per unit.
Suppose the price is at $3 per unit.
p
Supply:
4
3
Demand:
Shortage: 3.5
Q
4.5
6
8
Suppose the price is at $3 per unit.
8 million units will be demanded but only 4.5
million units will be supplied. This results in a
3.5 million unit shortage.
p
Supply:
4
3
Demand:
Shortage: 3.5
Q
4.5
6
8
Market Forces
• Surpluses result in suppliers having excess
inventory. They will cut the price in order to
clear their inventory.
Market Forces
• Surpluses result in suppliers having excess
inventory. They will cut the price in order to
clear their inventory.
• Shortages result in buyers bidding up the
price. Also suppliers, knowing that they will
clear all their inventory at a higher price, raise
the price in order to get more profit.
Can Shortages and Surpluses Persist?
Can Shortages and Surpluses Persist?
• When market participants are free to act, they
will naturally move the market to equilibrium.
Can Shortages and Surpluses Persist?
• When market participants are free to act, they
will naturally move the market to equilibrium.
• Only when an external coercive force
constrains the participants can shortages and
surpluses persist.
Can Shortages and Surpluses Persist?
• When market participants are free to act, they
will naturally move the market to equilibrium.
• Only when an external coercive force
constrains the participants can shortages and
surpluses persist.
• The only entity in human society with this
effective coercive power is ___________.
Can Shortages and Surpluses Persist?
• When market participants are free to act, they
will naturally move the market to equilibrium.
• Only when an external coercive force
constrains the participants can shortages and
surpluses persist.
• The only entity in human society with this
effective coercive power is the government.
Price Controls
•Price ceilings mandate that the price cannot
rise above a certain level.
•Price floors mandate that the price cannot fall
below a certain level.
Price Controls
•Price ceilings mandate that the price cannot rise
above a certain level.
•If that price is lower than the equilibrium price, the
result is a shortage.
p
Supply:
4
3
Demand:
Shortage: 3.5
Q
4.5
6
8
Price Controls
•Price floors mandate that the price cannot fall
below a certain level.
•If that price is higher than the equilibrium price,
the result is a surplus.
Price Controls
•Price floors mandate that the price cannot fall
below a certain level.
•If that price is higher than the equilibrium price,
the result is a surplus.
p
5
4
Supply:
Surplus: 7.5 – 4 = 3.5
Demand:
Q
4
6
7.5
Are Price Controls Detrimental to
Society?
Are Price Controls Detrimental to
Society?
• Shortages cause increase search costs.
Are Price Controls Detrimental to
Society?
• Shortages cause increase search costs.
• Price ceilings lead to quality deterioration (e.g.
candy bars during World War II).
Are Price Controls Detrimental to
Society?
• Shortages cause increase search costs.
• Price ceilings lead to quality deterioration (e.g.
candy bars during World War II).
• Black markets appear.
Are Price Controls Detrimental to
Society?
• Shortages cause increase search costs.
• Price ceilings lead to quality deterioration (e.g.
candy bars during World War II).
• Black markets appear.
• Increased enforcement costs.
Are Price Controls Detrimental to
Society?
• Shortages cause increase search costs.
• Price ceilings lead to quality deterioration (e.g.
candy bars during World War II).
• Black markets appear.
• Increased enforcement costs.
• Limits personal freedom.
Price Ceiling Example: Rent Control
• People hold on to housing space they don’t
need.
Price Ceiling Example: Rent Control
• People hold on to housing space they don’t
need.
• Investors are discouraged from building new
apartment units.
Price Ceiling Example: Rent Control
• People hold on to housing space they don’t
need.
• Investors are discouraged from building new
apartment units.
• Landlords have reduced incentive for upkeep
and maintenance.
What Can Be Done?
What Can Be Done?
“[W]e believe that the evidence suggests that
zoning is responsible for high housing costs,
which means that if we are thinking about
lowering housing prices, we should begin with
reforming the barriers to new construction in
the private sector.”
-Glaeser, Edward L. (Harvard) and Joseph Gyourko (Wharton). "The
Impact of Building Restrictions on Housing Affordability." FRBNY
Economic Policy Review / June 2003. Page 23
Price Floor: Minimum Wage Law
Price Floor: Minimum Wage Law
p=wage rate ($/hour)
Supply (Workers)
7.25
6
Demand
(Employers)
6
10
14
Q=quantity of lowskilled labor
(thousands of
hours/week)
Price Floor: Minimum Wage Law
At a price of $7.25/hr, low-skilled workers are willing to
work 14 thousand hours/week but employers are only
willing to accept 6 thousand hours/week. There is a
surplus of 8 thousand hours/week.
p=wage rate ($/hour)
Supply (Workers)
7.25
6
Demand
(Employers)
6
10
14
Q=quantity of lowskilled labor
(thousands of
hours/week)
Organs and Freeways
• Shortage of organs (kidneys, etc.)
• Congestion on freeways
Thank you for your time!
Consensus Among Economists
Rent control, minimum wage, tariffs, etc.
Which Variable is Dependent?
• Quantity depends on price but price also
depends on quantity.
• The more scarce the material, the higher the
price (e.g. gold versus iron ore)
• Supply: The larger the quantity supplied, the
higher the price. More materials must be bid
away from their other uses to supply the
product. This gets increasingly more
expensive (e.g. oil production, health care).
Law of Supply
• When excessive profits are available, new
competitors will enter the market.
• This new competition increases supply and
lowers the price.
• New and existing competitors will continue to
increase their output until there are no more
excessive profits to be made in that industry.
Law of Demand
• When the price is high, consumers restrict
their consumption.
• When faced with high rents, people will chose
to share apartments, rent smaller apartments,
rent rooms instead of apartments, move out
of the area, buy their own houses, etc.
• To sum it up, the cure for high prices is high
prices.
Without Rent Control, Who Protects
the Renter?
Without Rent Control, Who Protects
the Renter?
• Competition from other landlords.
Without Rent Control, Who Protects
the Renter?
• Competition from other landlords.
• When prices (and profits) of landlords are
high, new landlords will enter the market.
• With increased supply, the price will fall.
What Can Be Done?
"The bulk of the evidence marshaled in this paper
suggests that zoning, and other land-use controls, are
more responsible for high prices where we see them....
Measures of zoning strictness are highly correlated with
high prices. Although all of our evidence is suggestive,
not definitive, it seems to suggest that this form of
government regulation is responsible for high housing
costs where they exist…if policy advocates are
interested in reducing housing costs, they would do
well to start with zoning reform.“
-Glaeser, Edward L. (Harvard) and Joseph Gyourko (Wharton). "The Impact of Building
Restrictions on Housing Affordability." FRBNY Economic Policy Review / June
2003. Page 35