in the presence of free trade the producers of cheese in wisconsin will increase while the consu

Step 1: With free trade, the producers of cheese in Wisconsin will have access to a larger marke

In the presence of free trade the producers of cheese in...

Transcript

00:01 So here we're talking about price floors, which means the first thing i want to do is carefully illustrate what's going on, right? a price floor involves a market.

00:09 A market is a story about demand and supply.

00:11 For a binding price floor, right, this means that the price cannot go below this level.

00:16 So down here is going to be illegal and up here is going to be okay, right? so the free market equilibrium is blocked off, right? you're going to end up here.

00:27 This is the going to be the.

00:30 Equilibrium quantity and here this difference is what we would call a surplus right it is a surplus because quantity supplied is greater than quantity demanded right farmers would like to supply this much but there's nobody willing to buy it at this high price right so the price floor is going to raise the price but decrease the quantity right raise the price but decrease the quantity that's the effect so that's the simple part.

01:01 B, what happens to revenue? well, revenue is equal to price times quantity, and yeah, right, the price is going up and the quantity is going down.

01:12 So revenue will decline if percent change in quantity is greater than the percent change in price, right? if the price only goes up a little bit, but if the quantity goes down a lot, then the revenue is going to fall, right? it's not worth losing half your sales if you're only going to raise your price by a cent, right? so this is means that if demand is elastic, right? that is the definition of elastic demand.

01:43 Remember, we're moving from one point on the demand curve to another point on the demand curve.

01:49 So as we move up this line from the free market equilibrium to the price floor equilibrium, if that demand curve is elastic over that region, the quantity is going to decline by a lot more than the price.

02:01 And so revenue going to farmers might actually going down.

02:05 So now in policy three, we see is that government is the buyer of last resort, right? if i can make a macroeconomics joke.

02:18 If you use this phrase, your instructor will love you, i promise.

02:22 So the government now is going to buy all this cheese.

02:26 And this means that the government is going to buy and spend this giant block of revenue on cheese...

Question

In the presence of free trade, the producers of cheese in Wisconsin will increase, while the consumers of cheese will benefit.

Question

In the presence of free trade, the producers of cheese in Wisconsin will increase, while the consumers of cheese will benefit.

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