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1、ApplicationsofDemandandSupplyI.PriceControlsA.PriceCeilingB.PriceFloorsII.PriceElasticityofDemandA.Whatisit?-HowToFindIt?-ExampleB.EdVariesbyslope-ExtremesC.EdvariesbylocationonDemandLineExamplesPriceControls—Whengovernmentintervenesinamarkettofixpriceaboveorbelowequilibr

2、ium・2typesofpricecontrols:1.Priceceilings2.PricefloorsPriceceilingNote:ceilingdoitallowanythingabovethem.-Governmentmaintainspricebelowequilibrium・-Alegallyestablishedmaximumpriceasellercanchargeforaproduct.Ex:RentcontrolsinNYC,DC,LA,Boston&SanFrancisco•Anessentialproduct

3、(Ex:Aplacetolive)thatwouldbeunaffordabletothecommonpersonattheequilibriumprice・Ex:1971PresidentNixonfrozeallwages,prices&rentfor90daysinanefforttocurbinflationHowever,inthelastlecturewelearned:Ifpricebelowequilibrium=>shortageGraphEffectsofpriceceiling:1)Becauseofshortage

4、consumersspendmoretimesearchingforaproduct.2)Blackmarket&illegalactivitycanariseEx:Rentapartmentat$500.Illegallysubletat$600.Note:Ifpriceceilingisatoraboveequilibrium=>noeffect.PriceFloors:Note:Floorskeepthingsfromgoingbelowthem.-Alegallyestablishedminimumpricethataseller

5、canbepaid(aboveequilibrium.)Ex:Theminimumwage・Inthelabormarket:-Seller(supplier)=〉workersofferingtheirlabor-Buyer(demander)=>employers-Thepricethatlaborispaidisthewage(W)Doesthelawofdemandworkforlabor?Sure.Employer^pointofview:TW=>JQdofworkerbyemployersDoestheLawofSupplyw

6、orkforlabor?Sure・Frompotentialemployeepointofview:fW=>fQs(ofworkerwillingtowork)However,inthelastlecturewelearned:Ifpriceaboveequilibrium=>surplusGraphQs>Qd：atthathighwage,peoplewanttowork.However,theirskilllevelmaynotwarrant$5.15inthemarket・ElasticityofDemandRecall:LawOf

7、Demand9InverserelationshipbetweenPriceandQD.However,donotknowhowmuchQDwillchangeforapricechange.*HowresponsiveQDistoPA?ElasticDemand:AproductsuchthatQDisveryresponsivetoPZ.Ex:LuxuryGoods,DiningOutInelasticDemand:AproductsuchthatQDisnotveryresponsivetoPA.Ex:Drugs,Cigarett

8、es,InsulinPriceElasticityofDemand:-Measureshowsensitive(responsive)QDistotheP△・-unitlessmeasure-