he link is in the bottom of the page

1. Read "Florida Lawsuits Allege Price Gouging," and "They Clapped: Can Price-Gouging Laws Prohibit Scarcity?"
2. Read the article from Chapter 4 in your textbook: "In the News: Price Increases after Disasters" (pages 84-85) - (Week 1) - The article is the same in both the 7th and the 8th editions, but the art work varies.Also read the article -The Problem with Price Gouging Laws.
3. Watch the Price Gouging video above.
4. Summarize the main points of each article and decide which graph (A, B, C, or D) can be used to explain each event and why - be specific. More than one graph may apply. (SupplyAndDemandGraphs2.docandSupply and Demand Graphs.pptx)
5. What is your conclusion? Is price gouging a good thing or not? Or is it just necessary? Explain why.
6. Post your views to the discussion board and refer to at least two different concepts from this week's Chapters. Your illustration of concepts MUST include an explanation why you think they are are relevant to the week's topic using specific information from the articles, videos and other research that you have done.

Supply and Demand Guide

To solve the homework problems do the following:

1. Identify the determinant change
2. Shift the appropriate curve in the correct direction
3. Change price appropriately
4. Move along the other curve (the one that did not shift) in response to the price change.

The following information will tell you the determinants and how the change, as well as definitions of the key terms.

Demand

Demand:The amount that consumers are willing and able to purchase at various prices.

Law of Demand:Price and Quantity Demanded vary inversely.

Quantity Demanded:The amount that consumers are willing and able to buy at a particular price.

Change in Quantity Demanded:Changes in price change the quantity demanded.This is a Movement Along a Demand Curve in Response to a Price Change.

Change in Demand:This is a shift in the position of the demand curve, either upward or downward.If the curve shifts upward, consumers are saying they will pay more for all quantities of the good or service.If it shifts downward, consumers are saying they will pay less for all quantities of the good or service.

Determinants of Demand:The Demand Curve will shift only when one (or more) of the Determinants of Demand changes.These determinants are:

1. Size of Market:the number of consumers in the market for the good or service.If this factor increases, the curve shifts upward (increase in demand).If this decreases, the curve shifts downward (decrease in demand).

1. Consumer Tastes and Preferences:if these shift in favor of a product, the demand curve shifts upward (demand increases);if these shift against a product, the demand curve shifts downward (demand decreases).

1. Consumer Income:as the income of consumers increase, consumers purchase more of all normal goods (assume all the goods in the homework are normal goods),this shifts the demand curve upward (demand increases); if income decreases, then consumers buy less of all normal goods, this shifts the demand curve downward (demand decreases).

1. Prices of Related Goods:

1. Complimentary Goods:These are goods that are used to together like peanut butter and jelly.If the price of peanut butter goes up, the Quantity Demanded of peanut butter will decrease (a movement along a demand curve in response to a price change).However, the Demand for jelly will decline (decrease in demand) as fewer people buy it to go with the peanut butter, since they are buying less peanut butter.
2. Substitute Goods:These are goods that are used in place of each other.If the price of Coke Cola goes up, the Quantity Demanded of Coke does down (a movement along the demand curve).But the Demand for Pepsi - the substitute good - goes up as people substitute the lower priced Pepsi for the higher priced Coke (the Pepsi demand curve shifts upward).

1. Expectations about the Future:If people have a positive view of the future they will consumer more and save less.This shifts the demand curve for all normal goods upward.If people have a negative view of the future, they will consume less and save more, this shifts the demand curve for all normal goods downward.

Supply

Supply:The amount that producers are willing and able to bring to market at various prices.

Law of Supply:Price and Quantity Supplied vary directly.

Quantity Supplied:The amount that producers are willing and able to bring to market at a particular price.

Change in Quantity Supply:Changes in price change the quantity supplied.This is a Movement Along a Supply Curve in Response to a Price Change.

Change in Supply:This is a shift in the position of the supply curve, either upward (inward) or downward (outward).If the curve shifts upward, producers are saying they will bring less to market at all prices.If it shifts downward, producers are saying they will bring more to market at all prices.

Determinants of Supply:The Supply Curve will shift only when one (or more) of the Determinants of Supply changes.These determinants are:

1. Number of Firms in the Industry:If the number of firms in an industry increases, the more the industry can produce - this shifts the supply curve downward (outward) - this is an increase in supply.If the number of firms in an industry decreases, the industry can produce less output - this shifts the supply curve upward (inward) - this is a reduction in supply.

1. Relative Price of Alternative Outputs:If a firm can produce Product A or Product B with the same resources (inputs), it will produce the product with the higher price.If the price of Product A increases relative to Product B, then the firm will produce more of A and less of B.This causes the Supply Curve for A to shift outward (increase in supply) and the Supply Curve for B to shift upward (decrease in supply).

1. Costs of Production*:The costs of production is the primary determinant of supply.If the costs of production increase, then supply decreases - the Supply Curve shifts inward (a decrease in supply).If the costs of production decrease, then supply increases - the Supply Curve shifts outward (an increase in supply).

1. Expectations About the Future:If firms have a positive view of the future, they will increase production which is an increase in supply - the curve shifts outward.If firms have a negative view about the future, they will decrease production and the supply curve will shift upward - a decrease in supply.

*The Costs of Production include:

• Prices of inputs - the Factors of Production
• Business Taxes
• Complying with regulations
• Less any Subsidies the firm may receive

Chapter 4

Price Increases after Disasters

When a disaster such as a hurricane strikes a region, many goods experience an increase in demand or a decrease in supply, putting upward pressure on prices. Policymakers often object to these price hikes, but this opinion piece endorses the market's natural response. Is Price Gouging Reverse Looting? By John Carney F our dollars for a can of coke. Five hundred dollars a night for a hotel in downtown Brooklyn. A pair of D-batteries for $6.99. These are just a few of the examples of price hikes I or friends of mine have personally come across in the run-up and aftermath of hurricane Sandy. Price gouging, as this is often called, is a common occurrence during emergencies. Price gouging around natural disasters is one of the things politicians on the left and right agree is a terrible, no good, very bad thing. New York Attorney General Eric Schneiderman sent out a press release warning "against price inflation of necessary goods and services during hurricane Sandy." New Jersey Governor Chris Christie issued a "forceful reminder" that price gouging "will result in significant penalties." Hotlines have been established to allow consumers to report gouging. New Jersey's law is very specific. Price increases of more than 10 percent during a declared state of emergency are considered excessive. A New Jersey gas station paid a $50,000 fine last year for hiking gasoline prices by 16 percent during tropical storm Irene. New York's law may be even stricter. According to AG Schneiderman's release, all price increases on "necessary goods and items" count as gouging. "General Business Law prohibits such increase in costs of essential items like food, water, gas, generators, batteries and flashlights, and services like transportation, during natural disasters or other events that disrupt the market," the NY AG release said. These laws are built on the quite conventional view that it is unethical for a business to take advantage of a disaster in pursuit of profits. It just seems wrong for business owners to make money on the misery of their neighbors. Merchants earning larger profits because of a disaster seem to be rewarded for doing nothing more than raising their prices. "It's reverse looting," a neighbor of mine in Brooklyn said about the price of batteries at a local electronic store. Unfortunately, ethics runs into economics in a way that can make these laws positively harmful. Price gouging can occur only when there is a shortage of the goods in demand. If there were no shortage, normal market processes would prevent sudden price spikes. A deli owner charging $4 for a can of Pepsi would discover he was just driving customers to the deli a block away, which charges a buck. But when everyone starts suddenly buying batteries or bottles of water for fear of a blackout, shortages can arise. Sometimes there simply is not enough of a particular good to satisfy a sharp spike in demand. And so the question arises: how do we decidewhich customers get the batteries, the groceries, the gasoline? We could hold a lottery. Perhaps people could receive a ticket at the grocery store. Winners would get to shop at the usual prices. Losers would just go hungry. Or, more likely, they would be forced to buy the food away from the lottery winnersat elevated prices no doubt, since no one would buy food just to sell it at the same price. So the gouging would just pass from merchant to lottery winning customer. We could have some sort of rationing program. Each person could be assigned a portion of the necessary goods according to their household need. This is something the U.S. resorted to during World War II. The problem is that rationing requires an immense amount of planningand an impossible level of knowledge. The rationing bureaucrat would have to know precisely how much of each good was available in a given area and how many people would need it. Good luck getting that in place as a hurricane bears down on your city. We could simply sell goods on a first come, first serve basis. This is, in fact, what anti-gouging laws encourage. The result is all too familiar. People hoard goods. Store shelves are emptied. And you have to wonder, why is a first to the register race a fairer system than the alternative of market prices? Speed seems a poor proxy for justice. Allowing prices to rise at times of extreme demand discourages overconsumption. People consider their purchases more carefully. Instead of buying a dozen batteries (or bottles of water or gallons of gas), perhaps they buy half that. The result is that goods under extreme demand are available to more customers. The market process actually results in a more equitable distribution than the anti-gouging laws. Once we understand this, it's easy to see that merchants aren't really profiting from disaster. They are profiting from managing their prices, which has the socially beneficial effect of broadening distribution and discouraging hoarding. In short, they are being justly rewarded for performing an important public service. One objection is that a system of free floating, legal gouging would allow the wealthy to buy everything and leave the poor out altogether. But this concern is overrated. For the most part, price hikes during disasters do not actually put necessary goods and services out of reach of even the poorest people. They just put the budgets of the poor under additional strain. This is a problem better resolved through transfer payments to alleviate the household budgetary effects of the prices after the fact, rather than trying to control the price in the first place.... Instead of cracking down on price gougers, we should be using our experience of shortages during this time of crisis to spark a reform of our counter-productive laws. Next time disaster strikes, we should hope for a bit more gouging and a lot fewer empty store shelves.

The Problem with Price Gouging Laws by Rafi Mohammed JULY 23, 2013 When I meet people at parties, I'm often asked, "What do you do for a living?" After sharing that I help companies improve their pricing strategies, many smirk and flippantly retort, "Oh, ripping off the consumer." Sometimes, when I'm not in the mood to share my more benevolent philosophy of offering consumers a selection of pricing options, I simply reply, "As long as the product is not an absolute necessity, everyone always has the right to say 'no.'" This response seems to neutralize criticism and most people nod in agreement. But what if products are absolute necessities, such as critical supplies after a natural disaster? Many states have anti-gouging laws that curb price increases during disasters. In California, for instance, the maximum that retailers can raise prices after an emergency is 10%. Since this minimal upcharge won't effectively temper demand, limited supplies end up being rationed on a first-come, first-serve basis. While many view this policy as "fair," gouging laws have two key drawbacks: Encourages Hoarding: Those lucky enough to be at the front of the line tend to buy more than they really need. These "just-in-case" purchases an extra loaf of bread or perhaps filling up both cars with gas exacerbate a shortage. In contrast, doubling the price will make customers think twice about buying another gallon of milk, for example, thus leaving supply for those who didn't arrive at dawn. Discourages Businesses from Boosting Supplies: If prices are capped, there's little incentive for businesses to hustle to increase supplies. It's costly to find and transport extra products in hazardous conditions. If these extra costs eat up the profit associated with a fixed retail price, Adam Smith's invisible hand won't work; there's no financial carrot. As a society, we want incentives, for instance, that divert gas tanker trucks from neighboring unaffected states to disaster areas where fuel is in short supply. A well-known gouging case involves the invisible hand actions of John Shepperson. After the Hurricane Katrina disaster, John bought 19 generators, rented a U-Haul truck, and drove 600 miles from Kentucky to Mississippi. In return for his efforts and risk, he hoped to sell the generators at double his purchase price. Instead, he was arrested for price gouging, spent 4 days in jail, and the generators were confiscated. It's a tricky issue: while Mr. Shepperson's morality can be debated, his initiative would have unequivocally added supply and made some people better off. We all are charitable, of course, but how many of you would have rented a truck and driven twelve hundred miles round trip to sell generators for the price you purchased them? To be clear, I did not come up with the above points (hoarding, discourages boosting supplies) economists commonly use them in price gouging discussions. In fact, I paraphrased these arguments from papers written by two economists associated with the Federal Trade Commission (a government agency whose mission includes preventing business practices that are unfair to consumers), David Meyer and Michael Salinger. It's interesting to note that a past FTC Chair, Deborah Majoras, is on record as being against Federal gouging laws. This long-simmering "hold vs. raise prices" debate is polarizing. I've found that no amount of persuasive argument can change one's views. As a society, we are at stalemate on this issue. The good news is there is another option which bridges these two opposing points of views. Consider the following hybrid policy. During states of emergency, price gouging laws go into effect. However, federal and state governments provide subsidizes to retailers on essential products such as gasoline, primary food stuffs, and relevant construction materials. This combination of price controls and subsidies yields a best of both worlds scenario during emergencies. Prices are kept in-check and just as importantly, there are financial incentives for retailers to entrepreneurially boost stocks. How could this be implemented? Many states have tax holidays where certain products are not taxed. The same process/technology that identifies products sold at retailers which fit the tax holiday guidelines and then reports it to governments so they aren't taxed can be used to identify essential products sold during emergencies. This reporting will trigger subsidy payments. Most politicians favor price gouging laws during a disaster over allowing market clearing prices it's a safe and seemingly fairer pricing choice. As a consequence, shortages The Problem with Price Gouging Laws and the accompanying personal miseries/health risks are inevitable. While I am rarely a fan of government subsidies, in this case when used in conjunction with price controls they provide both a political and economic remedy to a life-affecting pricing dilemma.

(CNN) -- Florida Attorney General Charlie Crist filed lawsuits Tuesday against two hotels he said engaged in price gouging and other unfair practices as people fled Hurricane Charley.

Crist filed a complaint against a Days Inn in West Palm Beach and one against the Crossroads Motor Lodge in Lakeland.

"Hurricane Charley is the worst natural disaster to befall our state in a dozen years, and it is unthinkable that anyone would try to take advantage of neighbors at a time like this," Crist said.

"We are taking a two-pronged approach to fight this egregious behavior. Families putting their lives back together should not have to worry about price gouging."

The U.S. death toll from Charley rose to 19 Tuesday, the majority from traffic accidents, heart attacks and people electrocuted by live power lines, state officials said.

The state's latest estimate for the amount of damage caused by the storm is at least $11 billion, a number that is expected to rise as the costs are assessed. (Full story)

CNN was unable to reach anyone at Crossroads Motor Lodge for comment, and the manager at Days Inn also was unavailable for comment.

In the Lakeland complaint, the Crossroads Motor Lodge advertised rooms for less than $45 per night, but according to three affidavits, consumers who made reservations had difficulty getting their rooms.

All three were told no rooms were available. One, an 85-year-old woman, eventually paid $61.27 for a room, while the other two were turned away. One of those was unable to obtain a refund, the complaint said.

The other complaint alleges that a billboard near the Days Inn Airport advertised rooms for less than $50 per night, while the hotel charged more than double that to three customers who filed affidavits.

According to the affidavits, all three of the consumers were told the hotel had "only two rooms left," giving them a greater sense of urgency.

Crist said his office is investigating more than 1,200 complaints of price gouging. Florida's statutes require that the cost of necessities in the aftermath of a major storm remain at the average price of the previous 30 days.

Civil penalties range from $1,000 for a single violation to $25,000 for multiple violations committed in a single 24-hour period.

Further penalties can come from the state's Deceptive and Unfair Trade Practices Act, which provides for civil penalties of $10,000 per violation or $15,000 for violations against a senior citizen or handicapped person.

CNN's Rich Phillips contributed to this report.

They Clapped: Can Price-Gouging Laws Prohibit Scarcity?

Here's the thing: They clapped. I can't for the life of me understand why the people would clap. But I'm starting in the middle. Here is what happened:

Hurricane "Fran" smashed into the North Carolina coastline at Cape Fear at about 8:30 pm, 5 September 1996. It was a category 3, with 120 mph winds, and enormous rain bands. It ran nearly due north, hitting the state capital of Raleigh about 3 am, and moving north and east out of the state by morning. The storm also dropped as much as ten inches of rain. In some counties, nearly every building was damaged; total reconstruction cost and damages were later calculated at $5 billion (2006 $).

In the Triangle (Raleigh, Durham, and Chapel Hill), more than a million people were without power the next morning. Humidity made everything sticky. Hundreds of homes had roofs damaged by falling pines and powerful winds. Few residences had any kind of back-up power. Many roads were blocked by large fallen trees. Within hours, food in refrigerators and freezers started to go bad. Insulin, baby formula, and other necessities immediately became susceptible to spoilage in the 92+ degree heat.

The damage was so widespread, and communication so sketchy, that no one had any firm idea of when power would be restored. More than a million people needed ice. And they needed it now.

Resources on the Move... Not

One might think that thousands of entrepreneurs in the surrounding areas, little touched by the storm, would load trucks and head to the disaster area. After all, they owned, or could obtain, all the things that the residents of central North Carolina needed so desperately. Ice, chain saws, generators, lumber, tarps for covering gaping holes in roofs... we needed it all. I say "we" because my family lived in North Raleigh. No power, and 36 large pine trees smashed down like God's own pick-up-stix. We couldn't get out of our immediate Mungerhood, and my underpowered chain saw burned out on the first tree I tried to cut.But no such mass movement of resources to their highest valued use took place. North Carolina had an "anti-gouging law," which made it illegal to sell anything useful at a price that was "unreasonably excessive under the circumstances." This had been widely interpreted to limit price increases to around 5% or less. Each instance of violation of this law could result in a fine of up to $5,000. So, ice that happened in Charlotte,stayedin Charlotte. Why drive three hours to Raleigh when you can only charge the Charlotte price, plus just enough for gas money to break even?

The problem for Raleigh residents was all about price, at that point. The prices of all the necessities that I wanted to use to "preserve, protect, or sustain" my own life shot up to infinity. Within a day after the storm, there were no generators, ice, or chain saws to be had, none.But that means that anyone who brought these commodities into the crippled city, and charged less than infinity, would be doing us a service.

Some service was, in fact, on the way. Four young men in the town of Goldsboro, an hour east of Raleigh and largely untouched by the storm, noticed that the freezers at the Circle P's, the Stop Marts, and the Handee Sluggos were brimming with ice. Convenience stores had stocked up, expecting a more easterly course for the storm. Now, there was an ice surplus in Goldsboro, and a shortage in Raleigh. These young men rented two small freezer trucks, paid $1.70 each for 500 bags of ice for each truck and set off, filled with a sense of charity and the public good.

Okay, I made that last part up. They were filled with a sense of greed. They may have been bad human beings, real jerks. But who cares? If there had been a benevolent, omniscient social planner, she would have been yelling:(1) Raleigh is desperate for ice. (2) If you have ice, take it to Raleigh.Of course, there could never be a social planner with that level of information and authority, asHayek(1945) argued so persuasively. But these yahoos actedas ifthey heard one anyway, speaking through the price system: cheap ice in Goldsboro was expensive ice in Raleigh, so they could make money.

Our icemen came to the outskirts of Raleigh, and headed for the interior, where the citizens waited, pricelessly. The path was blocked by fallen trees, but these were yahoos, not idiots. Yahoos have chain saws, big ones. They rolled the cut logs off the road so their trucks (and, by the way, other cars and emergency vehicles) could pass.

One truck apparently parked in Five Points, near downtown, and another parked a bit west, near wealthy St. Mary's Street, and opened for business. I have not been able to find a definitive claim about price, but it was more than $8. (All three of my personal "sources" knew someone who saw events, but... I'd love to be able to ask the sellers if they knew of the anti-gouging law, but we'll never know, I guess.) On reaching the front of the line, some customers were angry that the price was so high, but almost no one refused to pay for the ice. I have also been told that the sellers limited purchases to 4, or 6, bags per customer, but I'm not sure. If it is true, it reflects the altruism of the native North Carolinian, even ones who are just trying to make a buck.

But the police are charged with upholding the law, even the dumb ones (laws, not police). Someone must have made a call, because two Raleigh police cars and an unmarked car pulled up to the Five Points truck after about an hour. The officers talked to the sellers, talked to some buyers, still holding their ice, and confirmed that the price was much higher than the "correct" price of $1.75 (the cost of a bag of ice before the storm). The officers did their duty, and arrested the yahoos.

Apparently the truck was then driven to the police impoundment lot in downtown Raleigh, as evidence. The ice may or may not have melted (accounts vary), but it certainly was not given out to citizens.

And now we are back to where I started: the citizens, the prospective buyers being denied a chance to buy ice...they clapped.Clapped, cheered, and hooted, as the vicious ice sellers were handcuffed and arrested. Some of those buyers had been standing in line for five minutes or more, and had been ready to pay 4 times as much as the maximum price the state would allow. And they clapped as the police, at gunpoint, took that opportunity away from them.

What Were They Thinking

I am completely stumped by the clapping. But then I'm stumped on why people support anti-gouging laws. I strongly suspect the two things are related.

Consider some quotes from the Raleigh paper, the News and Observer, in the days following the hurricane. First, on September 10, 1996, less than a week after the storm, in two different page 1 stories, we were told:

"Ice shortages are becoming severe in some placesso much so that local counties are asking the federal government to send as much ice as it can." (Eisley, 1996)

And:

"At the cabinet meeting, Richard Moore, Hunt's secretary for crime control and public safety, said... he was... deploying the state's Alcohol Law Enforcement officers to investigate reports of price-gouging of products in short supply.

Hunt said both Florida Gov. Lawton Chiles and South Carolina Gov. David Beasley had agreed to send truckloads of ice and other supplies to North Carolina." (Wagner and Whitlock, 1996).

When I read these two articles, I started sputtering like a crazy person to my poor wife. And I am still sputtering about it. These articles told me two things: #1Police and other government officials were being sent out to arrest anyone selling ice at a profit. #2There was a terrible ice shortage. We were so desperate for ice that the only option is to beg the federal government, or other state governments, for supplies from their ice hoards, because there was no other way to get it. I'm pretty sure I have a solution: stop doing #1, and #2 will go away like... well, like ice on a steamy September day in Raleigh. Ice is easy to make; just freeze some water. It's hard to make ice without electricity, but most of east, and all of west, North Carolina had plenty of electricity. And, in fact, they had plenty of ice. The problem is that the only real omniscient social planner we have is the market, and she speaks to people through prices. Dothis, stop doing that, build something here, move to this city. When the state made it a crime to sell ice at a profit, the price mechanism was struck dumb. Only a few people could hear it. And we threwthemin jail, ensuring that even fewer would heed the desperate call in the next crisis of deprivation.

Tale of Two Prices

Consider two prices. First, the price of ice before the storm, which most people know, or have a feel for. Second, the price of ice after the storm, which is unknown and highly variable. People who favor price-gouging laws think that the first price, the pricebeforethe storm, is the fair price, and that is the price they want to pay. The market priceafterthe storm reflects both the difficulty of getting ice from stores, because the store has no electricity, and the huge bump in demand for ice as thousands try to buy it.

Clearly, the relative scarcity of ice after the storm is much higher.The market price rises rapidly to reflect this increased scarcity. This makes people who would have used ice at the old price economize, and use something else. They can drink their bottled water, or their Carolina Ale, warm if they don't want to pay $12 for a bag of ice. So ice only goes to people who really value it. And the higher price also signals yahoos, wahoos, and all sorts of regular folks that one can make boxloads of money by taking truckloads of ice to Raleigh. The price system is automatically doing its job, signaling to buyers that they should cut back, and signaling sellers (even potential sellers, those who have to enter the market from Goldboro) that they should sell more.

If enough people bring ice to Raleigh, of course, the price won't be $12, or $8, for very long. Ice is easy to make and transport, so without market restrictions priceafterthe storm will quickly be driven down near the pricebeforethe storm, because there is so much more ice available. That's what the clapping peoplemust have wanted.Even the supporters of price-gouging laws want low prices and large supplies. But they can't get those things from a price-gouging law. Precisely the opposite happens, as the supply of ice disappears and the effective price, what people would bewillingto pay, goes higher and higher. I admit that it's not intuitive, until you think about it. The only way to ensurelowprices, and large supply, to buyers is to allow sellers to chargehighprices, the highest they can get.

Well, but what if you seek a political solution, rather than trusting markets? What if you pass an anti-gouging law, to symbolize your opposition to scarcity? Scarcity hurts; it means that I can't have everything I want. Let's abolish scarcity; what then? As I have tried to argue, all a state accomplishes by passing an anti-gouging law is to ensure that there is no ice. I can't get it for $100, or $1,000. And too many citizens say, "Help: the market has failed! Let's call on government to rescue us!"

But they are wrong. Markets didn't fail. All that happened was that the price mechanism was bound and gagged, held hostage in the attic of the legislature.