University towns with major football programs experience an...

University towns with major football programs experience an increase in demand for hotel rooms during home football weekends. Hotels respond to the increase in demand by increasing the prices they charge for rooms. Periodically, there is an outcry against the higher prices and accusations of "price gouging." a. Draw a demand and supply graph of the market for hotel rooms in Boostertown for weekends with home football games and another graph for weekends without home fotball games. If the Boostertown city council passes a law stating that prices for rooms are not allowed to rise, what would happen to the market for hotel rooms during home football game weekends? Show your answer on your graph. b. If the prices of hotel rooms are not allowed to in- crease, what will be the effect on out-of-town football fans? c. How might the city council's law affect the supply of hotel rooms over time? Briefly explain. d. University towns are not the only places that face peak and nonpeak "seasons." Can you think of other locations that face a large increase in demand for hotel rooms during particular times of the year? Why do we typically not see laws limiting the prices hotels can charge during peak seasons?

University towns with major football programs experience an increase in demand for hotel rooms during home football weekends. Hotels respond to the increase in demand by increasing the prices they charge for rooms. Periodically, there is an outcry against the higher prices and accusations of "price gouging."
a. Draw a demand and supply graph of the market for hotel rooms in Boostertown for weekends with home football games and another graph for weekends without home fotball games. If the Boostertown city council passes a law stating that prices for rooms are not allowed to rise, what would happen to the market for hotel rooms during home football game weekends? Show your answer on your graph.
b. If the prices of hotel rooms are not allowed to in- crease, what will be the effect on out-of-town football fans?
c. How might the city council's law affect the supply of hotel rooms over time? Briefly explain.
d. University towns are not the only places that face peak and nonpeak "seasons." Can you think of other locations that face a large increase in demand for hotel rooms during particular times of the year? Why do we typically not see laws limiting the prices hotels can charge during peak seasons?

Key Concepts

Seasonal Demand Variation

Many markets experience predictable fluctuations in demand due to seasonal factors or local events. During peak seasons, demand surges can drive prices up naturally. However, unlike temporary or emergency price controls, setting price ceilings during these peak periods is rare because such controls can lead to persistent shortages and reduced service quality as the market adjusts to these cyclical fluctuations.

Consumer Impact Due to Shortages

When price ceilings create shortages at peak demand periods, consumers, especially those willing and able to pay higher prices in an unrestricted market, can face difficulties in obtaining the good or service. In the context of peak demand, excess demand leads to nonprice rationing mechanisms where consumers might have to wait or seek alternative options.

Long-run Supply Response

Over time, if price controls persist, producers may experience reduced incentives to supply the good or service, leading to a decrease in overall availability. This long-term reaction can undermine the capacity to meet recurring spikes in demand, as potential suppliers either exit the market or reallocate resources to more profitable ventures.

Price Ceiling

A price ceiling is a legally imposed maximum price that can be charged for a good or service. When set below the market equilibrium price, it results in a binding constraint on the market that leads to a shortage, since the quantity demanded exceeds the quantity supplied. This policy intervention is often implemented with the intent of keeping goods affordable, but it can cause inefficiencies in market allocation.

Supply and Demand Analysis

This concept involves examining how the quantity of goods supplied and demanded interacts at various prices. It is used to illustrate market equilibrium where the supply curve and demand curve intersect, and to analyze how shifts in either curve affect the equilibrium price and quantity. In situations with temporary demand spikes, the demand curve shifts rightward, suggesting higher equilibrium prices, unless external interventions prevent that adjustment.

Market Equilibrium

Market equilibrium is the point where the quantity demanded by consumers equals the quantity supplied by producers at a particular price. In a free market, this equilibrium price adjusts naturally based on shifts in supply or demand. When external controls like price ceilings are applied, the market is forced away from this equilibrium, leading to unintended outcomes such as shortages.

Transcript

00:02 In this question, we have a situation where we're considering university towns with major football programs and what happens when their demand for their hotel rooms increases during home football weekends.

00:14 Usually these hotels will respond to the increase in demand by increasing the prices that are charging for these rooms.

00:20 And usually there's an outcry against these higher prices and people accuse them of price gouging.

00:26 So let's take a look at all the scenarios where we have a market for hotel rooms on weekends without games.

00:32 With games and weekends where there's a price ceiling intact.

00:37 This first scenario in the weekend without games and there's no price ceiling, then supply and demand is an equilibrium and prices are a p1 and quantity is at q1.

00:47 With games with a surge in demand as demand goes up from d0 to d1 then you're going to have an increase in quantity demanded from q1 to q2 this will push up prices from p1 to p2 and so prices go if that change in price is exorbitant then people are going to complain about it.

01:04 Now last scenario we have here is with the price ceiling.

01:07 So let's say the price ceiling is intact at the original equilibrium price at p1 and quantity supply to q1.

01:16 But because demand will still go up to q2, there's going to be a shortage of q2 minus q1, which is indicated over here.

01:25 And essentially if prices are allowed to increase, then all the out of town football fans will be facing a shortage of hotel rooms, as you can see.

01:31 There'll be way too much demand for the amount of supply because hotels won't provide more rooms if there's no incentive for them to do so, which should be being able to charge these higher prices.

01:42 Now, we also want to know what will happen to the supply of hotel rooms over time if this law remains intact...

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