1.3+Government+Intervention

Price Controls

Please watch this video for homework prior to the lesson. It will give you a good introduction to this important topic media type="file" key="max minimum pricing.swf" width="615" height="615"

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Student Starter Activity:

Suppose that the demand for and supply of milk in Australia are given in the table below:


 * Price (dollars per litre || Quantity demanded (megalitres per day) || Quantity supplied (megalitres per day) || New quantity supplied (megalitres per day) ||
 * 1.80 || 8 || 24 ||  ||
 * 1.75 || 10 || 22 ||  ||
 * 1.70 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">12 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">20 ||  ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1.65 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">14 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">18 ||  ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1.60 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">16 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">16 ||  ||
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">1.55 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">18 || <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">14 ||  ||

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">a. Using graph paper, accurately plot the demand and supply schedules.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">a. What is the equilibrium price of milk? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">b. What is the equilibrium quantity of milk traded?

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">c. Now suppose that a severe and prolonged drought triggers a decrease in the supply of milk by 8 megalitres a day at every price. If the market for milk isn’t regulated by the government: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Complete the new quantity supplied schedule in the table above, and using a different colour, plot the new supply line on your graph. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> ii. What is the new equilibrium price? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> iii.What is the new equilibrium quantity?

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">d. Suppose that the government imposes a maximum price (price ceiling) of $1.60 a litre to avoid hardship from the decrease in the supply of milk reported above. <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> i. How much milk will be demanded by consumers? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> ii. How much milk will be offered for sale by suppliers? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> iii. How much milk will be actually sold? <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;"> Iv. How much is the excess quantity of milk demanded?

<span style="font-family: "Trebuchet MS",Helvetica,sans-serif; font-size: 18px;">Extension Questions (HL students only) <span style="font-family: "Trebuchet MS",Helvetica,sans-serif; font-size: 18px;">Work out the change in welfare for producers, consumers and the Government. What is the net effect?

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Now download and work through these documents:



<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">[|and an excellent article courtesy of Tutor2u, on coffee price support schemes]

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[|and another one on rent controls]

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Student task: Identify a real world example of maximum or minimum price controls and evaluate the effects on various stakeholders. If you are struggling, look at the examples above for hints on analysis and evaluation

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 0px; overflow: hidden;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Taxes and Subsidies <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">And a more detailed analysis looking at impacts of subsidies on different stakeholders. If you didn't understand first time around, watch this again for homework: media type="youtube" key="WTTtyxaCl9s" width="560" height="315"

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">HL Content

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Subsidy example:

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">QD=200-P <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">QS=20+2P

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Find the initial equilibrium.

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Then the Government offers firms a subsidy of $15 per unit.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">How does this effect the equilibrium.
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">What is the total Government expenditure on this subsidy?
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">By how much do consumers benefit (change in consumer surplus)?
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">By how much do producers benefit (change in producer surplus)?
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 18px;">What is the total welfare loss due to the subsidy?
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">What is the total Revenue for firms?
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">What is the total expenditure by consumers
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">Calculate PED

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 1.5;">Helpful Diagram <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px; line-height: 0px; overflow: hidden;">

Subsidy answer

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Taxation and Community surplus.

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<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">SCOOP IT LINK TO GREAT NEWS ARTICLES ON MAXIMUM AND MINIMUM PRICING <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Good Ideas for IAs <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">media type="custom" key="28157071"