The Price System and Price Regulation

… a core topic in Economic Analysis and Atlas102

PriceHighValueTopic description

This topic deals with the price system in free markets and the impacts of price regulation by government.

The treatment of this topic on the Atlas follows closely that in Chapter 5, The Price System, and Chapter 6, Price Ceilings and Price Floors, in the open access Principles of Microeconomics course offered by Tyler Cowen and Alex Tabarrok at the Marginal Revolution University online education platform (http://www.mruniversity.com/courses/principles-economics-microeconomics, accessed 1 May 2016).

Topic learning outcome

Appropriately utilize and interpret results of applying to the analysis of public policy and management problems the basic principles of the price system and the impacts of price regulation, including following core concepts.

Core concepts associated with this topic
Price as Signal and Incentive

Markets Link Geographically

Markets Link Different Goods

Markets Link Over Time – Speculation

Futures

Prediction Markets

Price Ceilings

Rent Control

Price Floors

Minimum Wage

Airline Regulation and Wasteful Quality

Why Do Governments Enact Price Controls?

Price Controls and Communism

Readings

We believe that this topic and its core concepts can be mastered to the MPP/MPA level by watching and re-watching the 115 minutes of MRU course videos listed below and doing the 73 sample questions associated with these video segments and reproduced at the bottom of this page and repeated on the appropriate concept pages.

Atlas pages: The Price System and Price Regulation and associated Concepts

Alex Tabarrok, I Rose (3-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-system-definition-invisible-hand, accessed 1 May 2016.

Alex Tabarrok, Markets Link the World (5-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/markets-invisible-hand-supply-chain, accessed 1 May 2016.

Alex Tabarrok, Information and Incentives (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/information-problem-economics-hayek, accessed 1 May 2016.

Alex Tabarrok, A Price Is a Signal Wrapped up in an Incentive (5-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-system-spontaneous-order, accessed 1 May 2016.

Alex Tabarrok, The Great Economic Problem (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/economic-problem-central-planning-70s-oil-crisis, accessed 1 May 2016.

Tyler Cowen, Speculation (11-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/speculation-oil-futures-market, accessed 1 May 2016.

Tyler Cowen, Prediction Markets (9-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/prediction-markets-election-forecasting, accessed 1 May 2016.

Alex Tabarrok, Price Ceilings (4-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-controls-definition-nixon, accessed 1 May 2016.

Alex Tabarrok, Price Ceilings: Shortages and Quality Reduction (6-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-shortages-reduce-quality, accessed 1 May 2016.

Alex Tabarrok, Price Ceilings: Lines and Search Costs (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-gasoline-example-search-costs, accessed 1 May 2016.

Alex Tabarrok, Price Ceilings: Deadweight Loss (4-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-deadweight-loss, accessed 1 May 2016.

Alex Tabarrok, Price Ceilings: Misallocation of Resources (12-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-misallocation-of-resources, accessed 1 May 2016.

Alex Tabarrok, Price Ceilings: Rent Controls (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics, accessed 1 May 2016.

Alex Tabarrok, Price Floors (10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics, accessed 1 May 2016.

Alex Tabarrok, Price Floors: Airline Fares (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/price-floor-effect-on-quality-airline-deregulation, accessed 1 May 2016.

Textbook readings in MPP and MPA courses 

Harvard Kennedy School: API-101

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 10 (Pp. 357-385, 389-392)

NYU Wagner: GP-1018

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 6 and 7 (up to pg. 201)

Johnson-Shoyama: JS-805

Weimer, David L. and Aidan R. Vining. Policy Analysis, 5th edition. London: Longman Publishers, 2011. Chapters 6 and 7

George Washington: PPPA-6003

Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011. Chapters 6 and 8

Wheelan, Charles. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2010. Chapter 4

American: PAUD-630

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 5

Assessment questions (from MRU Practice Questions for Chapters 5 and 6)

From http://www.mruniversity.com/node/190032http://www.mruniversity.com/node/192285 and http://www.mruniversity.com/node/192286, http://www.mruniversity.com/node/192283, http://www.mruniversity.com/node/192285http://www.mruniversity.com/node/192287, http://www.mruniversity.com/node/192290http://www.mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-practice-questions?utm_source=PrinciplesAnnot&utm_medium=PQAnnot&utm_campaign=MRUYTAnnotation, http://www.mruniversity.com/node/201740, http://www.mruniversity.com/node/201776?utm_source=PrinciplesAnnot&utm_medium=PQAnnot&utm_campaign=MRUYTAnnotation, http://www.mruniversity.com/node/201785, http://www.mruniversity.com/node/201790http://www.mruniversity.com/node/201794, http://www.mruniversity.com/node/201803, http://www.mruniversity.com/node/201805http://www.mruniversity.com/node/201811?utm_source=PrinciplesAnnot&utm_medium=PQAnnot&utm_campaign=MRUYTAnnotation,  accessed 1 May 2016.

AQ102.05.01. Circa 1200 BCE, a decreasing supply of tin due to wars and the breakdown of trade led to a drastic increase in the price of bronze in the Middle East and Greece (tin being necessary for its production). It is around this time that blacksmiths developed iron- and steel-making techniques (as substitutes for bronze). What does the increasing price of bronze signal?

AQ102.05.07. Let’s see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it’s become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops?

AQ102.05.12. If a nation’s government made it impossible for inefficient firms to fail by giving them loans, cash grants, and other bailouts to stay in business, is that nation likely to be poorer or richer as a result of this strategy? (Hint: Steven Davis and John Haltiwanger. 1999. “Gross Job Flows.” In Handbook of Labor Economics (Amsterdam: North–Holland) found than in the United States, 60% of the increase in U.S. manufacturing efficiency was caused by people moving from weak firms to strong firms.)

AQ102.05.17. Suppose you learned that growing political instability in Chile (the largest producer of copper) will greatly reduce the productivity of its mines in two years. Ignoring all other factors, which curve (demand or supply) will shift which way in the market for copper two years from now?

AQ102.05.23. Let’s see if the forces of the market can be as efficient as a benevolent dictator. Since laptop computers are increasingly easy to build and since they allow people to use their computers wherever they like, an all-wise benevolent dictator would probably decree that most people buy laptops rather than desktop computers. This is especially true now that laptops are about as powerful as most desktops. Since it’s become much easier to build better laptop computers in recent years, laptop supply has increased. What does this do to the price of laptops?

AQ102.05.27. Sometimes speculators get it wrong. In the months before the Persian Gulf War, speculators drove up the price of oil: The average price in October 1990 was $36 per barrel, more than double its price in 1988. Oil speculators, like many people around the world, expected the Gulf War to last for months, disrupting the oil supply throughout the Gulf region. Thus, speculators either bought oil on the open market (almost always at the high speculative price) or they already owned oil and kept it in storage. Either way, their plan was the same: to sell it in the future, when prices might even be higher. As it turned out, the war was swift: After one month of massive aerial bombardment of Iraqi troops and a 100-hour ground war, then President George H. W. Bush declared a cessation of hostilities. Despite the fact that Saddam Hussein set fire to many of Kuwait’s oil fields, the price of oil plummeted to about $20 per barrel, a price at which it remained for years. How much money did speculators lose or make on each barrel?

AQ102.05.32. You manage a department store in Florida, and one winter you read in the newspaper that orange juice futures have fallen dramatically in price. Should your store stock up on more sweaters than usual, or should your store stock up on more Bermuda shorts?

AQ102.05.35. How does a free market eliminate a shortage?

AQ102.05.40. Suppose that the quantity demanded and quantity supplied in the market for milk is as follows: What is the equilibrium price and quantity of milk?

AQ102.05.45. When a price ceiling is in place keeping the price below the market price, what’s larger: quantity demanded or quantity supplied?

AQ102.05.57. The Canadian government has wage controls for medical doctors. To keep things simple, let’s assume that they set one wage for all doctors: $100,000 per year. It takes about 6 years to become a general practitioner or a pediatrician, but it takes about 8 or 9 years to become a specialist like a gynecologist, surgeon, or ophthalmologist. What kind of doctor would you want to become under this system? (Note: The actual Canadian system does allow a specialist to earn a bit more than general practitioners, but the difference isn’t big enough to matter.)

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AQ102.05.62. A review of the jargon: Is the minimum wage a “price ceiling” or a “price floor?”

AQ102.05.66. In the 1970s, AirCal and Pacific Southwest Airlines flew only within California. As we mentioned, the federal price floors didn’t apply to flights within just one state. A major route for these airlines was flying from San Francisco to Los Angeles, a distance of 350 miles. This is about the same distance as from Chicago, Illinois, to Cleveland, Ohio. Which flight had a nicer meal?

AQ102.05.70. If a government decided to impose price controls on gasoline, what could it do to avoid the time wasted waiting in lines? Though there are several solutions to this problem, only one of the options below is correct.

Page created by: Ian Clark, last modified on 16 May 2016.

Image: Minute 2:36 of Alex Tabarrok, Information and Incentives, at http://www.mruniversity.com/courses/principles-economics-microeconomics/information-problem-economics-hayek, accessed 1 May 2016.