hey everybody and welcome to the virtual lectures for chapter three part two so you covered the first i wouldn't say have the first three quarters of chapter three last module uh and in this module we're going to cover the last part of chapters three so in your book it's sections 3.4 and 3.5 as you can see i am uh sporting another new zoom background i if you didn't hear it in one of my earlier videos i got this email that said free econ zoom backgrounds and i had no idea what an econ zoom background would be and so this one is all about the topic we are going to cover today which i think is i cool is not the right word but anyway so there's richard nixon and i'll explain in a bit why i am lecturing with richard nixon sitting right next to me so let's get into our powerpoints and i'll explain when it comes up so here we go slideshow play from start so again this is chapter three part two supply and demand part two okay so in this chapter we're gonna learn about price ceilings and price floors in the next video we're gonna learn about demand supply and how we can use supply and demand to measure efficiency which is a topic we've already heard about this semester all right so what we learned last semester was this invisible hand this idea that supply and demand sets prices in a market right it's the idea that no one has to tell the market what the price of a good should be when supply and demand interact the price kind of just emerges through the system of shortages and surpluses and signals to raise and lower prices okay so but occasionally the equilibrium price for a good or service excuse me i suffer from seasonal allergies anyway but occasionally equilibrium price for a good or service can be very high pricing out certain consumers in a way that doesn't feel right it feels like it's bad for society so one example is rent excuse me rental prices in cities like new york and san francisco we've all heard about how outrageous rents are in san francisco and yes it is that is outrageous as you can imagine one-bedroom apartments going for three to four thousand dollars a month um and there is a lot of thought that things like this might not be right so even though these prices are created by the forces of supply and demand these forces might not be best for for the health of an economy overall at least that could be the opinion of certain policy makers okay other times we might think prices are too low so in a way that can be harmful to producers and a good example of this is in agricultural prices and so often prices for agricultural gets too low and it can really harm the strength of the economy there's an example of this in this week's podcast when the price of milk got so low that the government was afraid that dairy farmers would have to go out of business and if dairy farmers go out of business you could have milk shortages and so there was this issue of what can the government do to help dairy farmers and so you're going to learn about that in this week's podcast okay so when the government thinks that these problems can happen they can institute what are called price controls and there's two types of price controls we're going to discuss in this chapter price ceilings and price floors so a price ceiling is a government imposed maximum price okay it's called a ceiling because like a ceiling is the highest point of a room a price ceiling is the highest price a or highest level of price can legally go okay so the most common example of price ceilings in our society is rent control okay so you've probably heard the term rent control red control can take a lot of different forms we're going to be overly simplistic with the way we describe rent control in this class we're going to say rent control is just a maximum price that rent can reach you cannot charge higher than x amount on rents in real reality rent control is a little more complicated usually has to do with how much you can raise rents and things like that but we're going to be overly simplistic to make our point because it really does impact rents in the same way it's just as hard to show on our model if we don't make these simple simple assumptions okay so price stealing the might sound good in the terms of rent rents because you know it makes apartments cheaper for uh for potential renters but it can have some some disastrous impacts in the economy and that's what we're going to see in these slides okay so this is our market for apartments and suppose the supply and demand are depicted as you can see we see the equilibrium price here at 1250 and the equilibrium quantity is 25 000 apartments okay so that is our equilibrium and remember equilibrium is balanced equilibrium means the amount of people seeking apartments equals the amount of people uh wanting to rent out apartments okay but suppose the government says that this equilibrium price of 1250 and if you can't see where i'm getting 1250 from let me make a note of this real quick so here's my equilibrium so that's my price notice it's 1250 and this is my quantity of 2500 okay so let me put some just draw these in here so this is 1250. like always i'm going to draw the this model and go through it in front of you as if i was using a whiteboard and then when you see these slides you can click through and see them drawn digitally and they'll obviously look a lot better when they're digital okay so let's say the government says 1250 is too high and they think a thousand dollars is the maximum price that an apartment should be so there let's say the government sends a price control there we go so like i said we can see right there in fact that's fine let's say the apartment the the government sense uh that doesn't work because my uh these don't lie up here the government sets a maximum price a price ceiling at twelve at a thousand dollars and that says this is the limit a thousand dollars the price of an apartment cannot go above a thousand dollars okay and now let's examine what's going to happen in this market if the price is can't go above a thousand dollars okay so all we have to do is look at our supply and demand graph and so we're going to look at supply here and what this point here is telling me i'm going to change colors so we can see it what this point here is telling me is that at a price of a thousand dollars the quantity supplied is 20 000 apartments okay it says here that the quantity demanded is thirty thousand apartments so what does that mean that means that there are thirty thousand people wanting to rent apartment in this city but it's saying there's only twenty thousand apartments for rent so this is a shortage and so that is the result of a price ceiling that's set down here below the equilibrium price if you set a price ceiling that you know one that's below equilibrium so one that actually changes anything then it's going to create a shortage in the market and let's think about why it would create a shortage in the market so you have equilibrium that says at 1250 bits set but if you lower the price to a thousand dollars that increases the quantity demanded there are people when the price is 1250 who say you know what i don't need to live in the city i'm going to live just outside or there's people who decide that they're going to live together where there's people are going to stay with their parents but when the price goes down more people see that thousand dollars and think i can afford that and now you have more people wanting to live in a city at the same time when the price goes down there are fewer apartments for rent okay you might think that this doesn't make a lot of sense if you have an apartment you're going to rent it no matter what but that's actually not the case there's evidence there are thousands of unrented apartments in san francisco as a result of rent control in san francisco why because apartments are can be expensive to upkeep between insurance the cost of finding tenants that can be expensive and so sad at lower prices some people might not think it's worth it other apartments might be potentially available but would take an investment to get them up to code or take an advanced investment to make them habitable at lower prices it might not be worth that investment so they might sit there uninhabitable you might also be someone who has some extra space and might think about renting it out at a high price but a lower price you might think it's not worth it i'll keep the extra space for myself i will use it as a short-term rental like on airbnb and you don't want to you don't rent it out as a traditional apartment because of the lower price it's not worth it so as a result you have both these effects going at the same time fewer apartments for rent more people wanting to rent apartments obviously i've drawn this as an over simplification in the next module we're going to learn about something called elasticity and when you change the elasticity around in this drawing it will make it look less drastic you know this shows a huge drop-off in apartments when there's a small decrease in the price and that might be unrealistic but that's what we're going to use for the assumption in our model but the main takeaway i want you to get here is that when you have price ceilings you create shortages okay so i'm going to stop the video well first let me uh clear this and let you see the full drawing which of course just shows we drew there and now i want to stop my sharing to talk a little bit about my friend turkey dick nixon here so if you can read this quote and i don't know if you guys have ever presented on zumba but it's backwards for me so i'm having trouble reading it says i am today or ordering a freeze on all prices and wages throughout the united states so on this date uh august 15th 1971 president nixon ordered a price freeze meaning you couldn't raise prices so this is just like a price ceiling so you couldn't lift prices off prices were stuck well over time what we saw last module is we know prices change right prices change over time and over time there's pressure for prices to rise but because of nixon's law prices couldn't rise so what does that do in a market for say gasoline so we know the price of gasoline fluctuates and so if the demand for gasoline goes up and prices should go up which is what happens when when the the demand goes up um but it's stuck and it can't go up any higher what's going to happen what's going to happen is a gas shortage what's going to happen is you're going to have the quantity demanded for gas is greater than the quantity supplied and you're not going to have um you're you're not going to have enough gasoline to go around and so what ended up happening was long long long lines for gas because when people couldn't raise the price as far as money is concerned consumers had to raise the price when it comes to time and so this is the argument against price ceilings and price ceilings aren't really popular policies anymore you do see rent control in places around the country but like i said they're a little bit more complicated than it was as simply as we do but this is a good lesson on the sort of the efficiency and uh the of a price of the free market and what we're going to learn in our next section is how we can measure that okay and so uh i'm gonna say one more thing about this video but i wanted to say this last because this is a little bit of a trigger warning if you're really sensitive to animal abuse let's just end it right now because i'm gonna say is not terribly important for understanding but is something that happened in the 1970s as a result of this price ceiling okay so again and now if this is something you're sensitive to if not um we'll just tell this last story and then we'll begin the next video so in the 70s during this this this price ceiling one of the things that the price ceiling hit was on the sale of chicken okay so the sale of chicken to eat um could not be raised in price but something that did not raise in price was the price of chicken feed okay so it became really really expensive to feed your chickens so feeding your chickens meant you were losing money because it cost money to feed the chickens and then you weren't able to get your money back by selling them so what did farmers do with all these chickens well instead of feeding these baby chicks who had not yet grown fat enough to sell uh they drowned them in in mass numbers and so there's these like horrific images of farmers loading barrels full of baby chicks to drown because they were not worth feeding um because of of this price control so this is just another example of like the craziness that can uh that can come from a from a government intervention in a market that might not need that intervention okay so that is uh the end of this video we're going to learn in the next video about price floors which is the mirror image of a price ceiling