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9/17/2014

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Review: Determinants of Supply
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Review: Determinants of Demand
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A. B. C. D.
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A. Marginal surplus
B. Marginal shortage
C. Consumer surplus
D. Producer surplus
1. On the graph, the area labeled 1
represents
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$5
$9
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A. B. C. D. E.
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1 1
A. $20
B. $40
C. $50
D. $90
E. Cannot be determined
2. On the graph, total consumer
surplus equals
A. B. C. D.
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1
7
0
A. Equilibrium Price Up
B. Equilibrium Price Down
C. Equilibrium Quantity Up
D. Equilibrium Quantity Down
3. Dog Food Market: More new dog
owners; price of cat food has
increased. (Assume cat food and dog
food are substitutes in production).
Which is necessarily the case?
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A. B. C. D.
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10
0
4
A. Equilibrium Price Up
B. Equilibrium Price Down
C. Equilibrium Quantity Up
D. Equilibrium Quantity Down
4. Household goods: The federal
government has raised taxes on
individuals and businesses. Which is
necessarily the case?
A. B. C. D.
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1
0
1
A. Equilibrium Price Up
B. Equilibrium Price Down
C. Equilibrium Quantity Up
D. Equilibrium Quantity Down
5. Gasoline: Terrorists bomb gas
refineries. Terrorism threat causes
people to fly less and drive more.
Which is necessarily the case?
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Government
Involvement
#1-Price Controls: Floors and Ceilings
#2-Import Quotas
#3-Subsidies
#4-Excise Taxes
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#1-PRICE CONTROLS
Who likes the idea of having a price ceiling on
gas so prices will never go over $3 per gallon?
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Q
o
$5
4
3
2
1
P
10 20 30 40 50 60 70 80
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D
S
Shortage
(Qd>Qs)
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
Gasoline
Does this
policy help
consumers?
Result: BLACK
MARKETS
Price
Ceiling
Price Ceiling
To have an effect,
a price ceiling must be
below equilibrium
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Q
o
$
4
3
2
1
P
10 20 30 40 50 60 70 80
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D
S
Surplus
(Qd<Qs)
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
Corn
Does this
policy help
corn
producers?
Price Floor
Price Floor
To have an effect,
a price floor must be
above equilibrium
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Are Price Controls Good or Bad?
To be efficient a market must maximize
consumers and producers surplus
Q
P
D
S
P
c
Q
e
CS
PS
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Are Price Controls Good or Bad?
To be efficient a market must maximize consumers and
producers surplus
Price
FLOOR
Q
P
D
S
P
c
Q
e
Q
floor
DEADWEIGHT LOSS
The Lost CS and PS.
INEFFICIENT!
CS
PS
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Are Price Controls Good or Bad?
To be efficient a market must maximize consumers and
producers surplus
Q
P
D
S
P
c
Q
e
CS
PS
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Are Price Controls Good or Bad?
To be efficient a market must maximize consumers and
producers surplus
Price
CEILING
Q
P
D
S
P
c
Q
e
Q
ceiling
DEADWEIGHT LOSS
The Lost CS and PS.
INEFFICIENT!
CS
PS
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9/17/2014
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Minimum Wage
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www.whitehouse.gov/raise-the-wage:
In the 2014 State of the Union address,
President Obama called on Congress to
raise the national minimum wage from
$7.25 to $10.10 an hour . . .
Raising the minimum wage nationwide
will increase earnings for millions of
workers, and boost the bottom lines of
businesses across the country. . .
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ANONYMOUS POLL:
I believe the legal minimum wage
should be . . .
A. Left where it is ($7.25)
B. Raised to $10.10/hour
C. Raised to more than
$10.10/hour
D. Eliminated: minimum
wage laws should be
repealed
A. B. C. D.
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0 0
2
S
Wage
Q Labor
D
Fast Food Cooks
$15
$8
$6
The government wants to
help workers because the
equilibrium wage is too low
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S
Wage
Q Labor
D
Fast Food Cooks
Government sets up a
WAGE FLOOR.
Where?
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$15
$8
$6
5 6 7 8 9 10 11 12
S
Wage
Q Labor
D
Minimum Wage
Above
Equilibrium!
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$15
$8
$6
5 6 7 8 9 10 11 12
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S
Wage
Q Labor
D
Whats the result?
Q demanded falls.
Q supplied increases.
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$15
$8
$6
5 6 7 8 9 10 11 12
Surplus of workers
(Unemployment)
Minimum Wage
Is increasing minimum wage good
or bad?
GOOD IDEA-
We dont want poor people living in the street, so
we should make sure they have enough to live on.
BAD IDEA-
Increasing minimum wage too much leads to more
unemployment and higher prices.
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