ACC 818 — Module 4: Price Controls, Market Efficiency & Short-Run Production
Two halves: (1) what happens when government overrides market prices, and (2) the foundation of firm theory — short-run production and cost curves.
Learning Outcomes
- Discuss government-controlled prices
- Contrast price floors with price ceilings
- Explain long-run vs. short-run effects of rent controls
- Generalize about economic production, costs, and profits in the short run
Topic 1: Price Ceilings
- Maximum legal price, set below market equilibrium. Example: rent control.
- Short-run benefit: lower prices for some consumers.
- Long-run cost: shortages (Qd > Qs), reduced quality (landlords cut maintenance), reduced supply (conversions to condos), black markets.
Topic 2: Price Floors
- Minimum legal price, set above market equilibrium. Examples: minimum wage, agricultural price supports.
- Intent: protect workers/farmers from low compensation.
- Side effect: surplus (Qs > Qd) — e.g. unemployment if minimum wage exceeds market-clearing wage.
Topic 3: Market Failures and Government Intervention
- Externalities — costs/benefits not captured by market prices.
- Positive externalities (education, healthcare) → underprovided by market → government subsidizes.
- Negative externalities (pollution, smoking) → overprovided by market → government taxes (e.g. tobacco taxes).
Topic 4: Short-Run Production
- Factors of production — labor, capital, natural resources.
- Short run — period in which at least one factor is fixed (typically capital — buildings, equipment).
- Long run — period in which all factors can vary.
- Fixed costs — don’t change with output (rent, machinery, R&D).
- Variable costs — change with output (labor, raw materials).
- Total product, average product, marginal product describe how output responds to adding more of a variable input (typically labor).
- Diminishing returns — eventually, adding more of a variable input to fixed capital yields smaller and smaller increases in output.
Accounting vs. Economic Concepts
A persistent theme: accountants count explicit costs only. Economists also count opportunity costs (what the firm’s resources could have earned in the next-best use). So economic profit < accounting profit. A firm with positive accounting profit can have zero or negative economic profit.
Key Terms
Price Ceiling · Price Floor · Externality · Subsidy · Pigouvian Tax · Fixed Cost · Variable Cost · Marginal Product · Diminishing Returns · Economic Profit