Meco 6303 business economics
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MECO 6303 – Business Economics. Lesson Six Economic Policies Part A Consumer and Producer Surplus; Price Fixing, minimum wages and rent cotnrols . Consumer Surplus. P. Consumer surplus and the difference between price and value – the diamond-water paradox . P 1. P 2. P 3. P*. D. Q.

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MECO 6303 – Business Economics

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Meco 6303 business economics

MECO 6303 – Business Economics

Lesson Six

Economic Policies

Part A

Consumer and Producer Surplus; Price Fixing, minimum wages and rent cotnrols.


Consumer surplus

Consumer Surplus

P

Consumer surplus and the difference between price and value – the diamond-water paradox.

P1

P2

P3

P*

D

Q

O

Q3

Q1

Q2

Q*

Lesson Six


Producer surplus

Producer Surplus

P

S

P*

P1

P2

P3

Q

O

Q3

Q1

Q2

Q*

Lesson Six


Consumer and producer surplus

Consumer and Producer Surplus

S

Consumer surplus

P*

Producer surplus

D

Q*

Lesson Six


Observations on consumer and producer surplus

Observations on Consumer and Producer Surplus

  • At the equilibrium price consumer and producer surplus are maximized

  • Anything that moves us away from that point will reduce consumer and producer surplus

  • These concepts are partial equilibrium concepts and serve best for isolated markets

Lesson Six


Price fixing

Price Fixing

  • Fixing prices = non-price rationing

    • A floor – minimum wages

    • A ceiling – rent controls

  • Price fixing always has unintended consequences that are the opposite of what is intended.

    • Floors cause surpluses

    • Ceilings cause shortages.

Lesson Six


A floor

A floor

Transfer from consumers to producers

Surplus = Qs - QD

S

Pmin

Loss of Consumer Surplus

P*

Loss of Producer Surplus

D

O

QD

Q*

QS

Lesson Six


A ceiling

A ceiling

Transfer from producers to consumers

S

Loss of Consumer Surplus

P*

Loss of Producer Surplus

Pmax

D

Shortage = QD - QS

O

QS

Q*

QD

Lesson Six


A price floor minimum wages

A price floor – minimum wages

Supply of labor

Wage rate

Transfer from employers to

workers.

Wmin

LS – LD is a surplus of labor

= Unemployment.

C

  • Loss of C & P Surplus

    • Can it be enforced?

    • Whom does it benefit?

A

W*

E

B

Demand for labor

Quantity of unskilled labor

LD

LS

L*

Lesson Six


The effects of minimum wages

The effects of minimum wages

  • The apparent aim of a minimum wage law is to benefit the poor – those at the bottom of the wage scale.

  • Some effects are obvious some are not

    • An increase in current unemployment (compared to what it would otherwise be)

    • The increase affects primarily the least productive, those economically worst off.

    • The disemployed may be affected for extended time.

    • Note the effects on consumer and producer surplus

  • So why do minimum wage laws exist? Whom do they benefit? Primarily organized labor (trade unions).

Lesson Six


Meco 6303 business economics

A Price Ceiling – rent control

Transfer from renters to owners

Rental rate

Supply of housing

HD – HS is a shortage of housing

rbribe

C

A

E

r*

B

rmax

Demand for housing

HD

HS

H*

Quantity of housing

Lesson Six


The effects of rent control

The effects of rent control

  • The apparent aim of a rent control law is to benefit the poor – those least able to afford decent housing.

  • Some effects are obvious some are not

    • An decrease in affordable housing

    • The decrease affects those economically worst off.

    • The displaced may be affected for extended time. Rental housing construction and maintenance depends on the rate of return.

  • So why do rent control laws exist? Whom do they benefit? I don’t know.

  • Salary caps, and similar controls, work in the same way.

Lesson Six


Conclusions

Conclusions

  • Supply and Demand concepts are part of an “engine of analysis”

    • We always start with it – there may be complications, but there is no better starting point

    • The examples of price fixing show how powerful it can be.

Lesson Six


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