Chapter 4: Prices - Free, Controlled & Relative

Chapter Four Prices: Free, Controlled, and Relative Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly a...

Chapter Four Prices: Free, Controlled, and Relative Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1  Icebreaker 1. The class will be broken up into pairs of students. 2. Each pair of students will discuss the question. − Scenario: You are moving to a new city and need to look for a place to live. Would you prefer to look for a place where the rent is regulated or where the rent is determined by the market? Why would you choose that option? 3. Then one person from each pair will share a one sentence answer to the class. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Chapter Objectives By the end of this chapter, you should be able to: Determine if a price control is a price ceiling or a price floor using the supply and demand model. Determine the amount of shortage or surplus generated by a price control using the supply and demand model. Determine the impact of price controls on economic welfare using the supply and demand model. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Price Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Price as a Rationing Device To most people, price is a number with a dollar sign in front of it, such as $10 Price performs two major jobs; the first is that price acts as a rationing device − Because of scarcity, a rationing device is needed to determine who gets what of the available limited resources and goods  It rations resources to the producers who pays the price for the resources  It rations goods to buyers who pay the price for the goods − Doesn’t this discriminate against the poor?  Yes, but every rationing device discriminates against someone  Some other rationing devices are first come, first served; brute force; lottery Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Price as a Transmitter of Information Price performs two major jobs; the second is that price acts as a transmitter of information − Price and its changes relays information about what is happening in the market as it often relates to the relative scarcity of a good − Market system is powerful enough that people respond to the information that price is transmitting Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Price Controls Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Types of Price Controls Price is not always allowed to be a rationing device Sometimes price is controlled and there are two types of price controls: − Price ceilings − Price floors Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Price Ceiling Price Ceiling: A government- mandated maximum price above which legal trades cannot be made Results: − Shortages − Few exchanges − Nonprice rationing devices Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Price Floor Price Floor: A government-mandated minimum price below which legal trades cannot be made Results: − Surpluses − Few exchanges − Nonprice rationing devices Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Applications of Price Controls Price Ceiling: Rent Control Price Floor: Minimum Wage Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Changes in Consumers’ and Producers’ Surplus Deadweight Loss: The loss to society of not producing the competitive, or supply-and-demand- determined, level of output − Transfer from consumers to producers: area 2 − Loss to consumers: area 3 − Loss to producers: area 5 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Knowledge Check 1a Based on the information in the table, how many units will be exchanged if the government imposes a price ceiling of $2? Price Quantity Demanded Quantity Supplied $2 100 70 $3 80 80 $4 60 90 $5 40 110 A. 70 units B. 30 units C. 10 units D. 100 units Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13  Knowledge Check 1b A price ceiling (below the equilibrium price) can bring about all but _____. A. a shortage B. a surplus C. the use of nonprice rationing devices D. tie-in sales Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Knowledge Check 1c If a price floor is set above the equilibrium price of a good, the price floor will A. result in a shortage of the good. B. push the market for the good to equilibrium. C. result in a surplus of the good. D. have no impact on the market for the good. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Two Prices: Absolute and Relative Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Absolute and Relative Prices Absolute (money) Price: The price of a good in money terms Relative Price: The price of a good in terms of another good − Suppose the absolute price of a car is $30,000 and the absolute price of a computer is $2,000 − Then the relative price of the car (in terms of computers) is 15 computers; a person gives up the opportunity to buy 15 computers when buying a car Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Taxes on Specific Goods Suppose the equilibrium price of good X is $10 and good Y is $20 The relative prices are: 1 X = ½ Y and 1 Y = 2 X Now, suppose the government imposes a tax only on the purchase of good X; the tax effectively raises the price the consumer pays from $10 to $15; the relative prices are now: 1 X = ¾ Y and 1 Y = 1.33 X The tax makes good X relatively more expensive and makes good Y relatively cheaper; so we would expect consumers to buy relatively less X, and more Y Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Knowledge Check 2a The absolute price of a good A. necessarily falls as the price of a complementary good falls. B. necessarily rises as the price of a substitute good falls. C. is the price of one good in terms of another good. D. is the price of a good in money terms. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Knowledge Check 2b The price of good A is $80 and the price of good B is $20, it follows that the relative price of one unit of good A is _____ units of good B. A. 4 B. 0.25 C. 0.025 D. 0.4 Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Knowledge Check 2c A tax placed on the purchase of one good and not another good can lead to A. a change in the relative price of the good that the tax was not placed on. B. a change in the relative price of the good the tax was placed on. C. a change in the relative price of both goods. D. a situation where relative prices remain unchanged. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Chapter Summary Now that the lesson has ended, you should have learned how to : Determine if a price control is a price ceiling or a price floor using the supply and demand model. Determine the amount of shortage or surplus generated by a price control using the supply and demand model. Determine the impact of price controls on economic welfare using the supply and demand model. Arnold, Economics, 14 Edition. © 2023 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22