Global Arts MBA 2027 Cohort | T1.FT2.S5 Applied Economics | 2026-11-05

Recap: Externalities and Public Goods

The instructor began by reviewing earlier material on markets and trade. Markets can create externalities when an activity affects other people without that effect being directly traded. The arts may also have features of a public good, which can lead markets to provide less of them than would be socially desirable. This is one reason arts organizations may need to make a strategic case for their value.

Consumer and Producer Surplus

The main topic was surplus, a way to describe how the benefits of trade are shared between buyers and sellers.

• Consumer surplus is the difference between what a buyer would have been willing to pay—their reservation price—and what they actually pay.
  • On a supply-and-demand graph, it is the area below the demand curve and above the market price, up to the quantity sold.
  • With one uniform price, buyers who would have paid more than the market price receive a benefit.
• Producer surplus is the difference between the price sellers receive and the lowest price at which they would have been willing to supply the good.
  • On a graph, it is the area above the supply curve and below the market price, up to the quantity sold.
• Together, consumer and producer surplus represent the gains from trade: the total benefits created by the market in the model.

The instructor illustrated consumer surplus with coffee buyers who had different maximum willingness to pay. At a given price, those willing to pay more than the price receive surplus; those unwilling to pay that much do not buy.

How Price Changes Affect Surplus

When firms reduce their price, more people may buy. The change in consumer surplus can be understood in three parts:

1. Surplus existing customers already received at the old price.
2. Extra surplus for existing customers because they now pay less.
3. Surplus gained by new customers who begin buying at the lower price.

The instructor gave several possible reasons for a price reduction:

• Increased competition among sellers.
• Lower input costs, such as the wholesale price of coffee.
• Higher productivity, allowing firms to produce more efficiently.

For producers, a higher market price generally increases producer surplus, while a lower price tends to reduce it.

Demand Shifts, Elasticity, and Perceived Value

A change in price is different from a change in demand. If consumers’ tastes, information, or perceptions change—for example, if a show receives excellent reviews—demand can shift to the right. At the new equilibrium, both the price and quantity may rise.

The instructor’s key point was that a higher price does not automatically mean consumers are worse off. If consumers’ willingness to pay has risen because they value the good more, their consumer surplus can also increase despite the higher price. The gains for buyers and sellers need not be proportional.

The discussion also connected the shape of demand to elasticity:

• A steep demand curve represents relatively inflexible demand: buyers respond less to price changes. If the market price is below what they would have paid, their surplus can be large.
• A shallow demand curve represents more flexible demand: buyers are more willing to switch to alternatives, so their surplus may be smaller.

Participants raised questions about what “quality” means. The instructor clarified that sometimes the product itself improves; in other cases, people discover or recognize its value over time. Either can increase willingness to pay. He also distinguished this kind of demand shift from a supply shock, such as rising wholesale energy costs, which can reduce supply and push prices up.

Government Rules That Affect Markets

The instructor introduced several kinds of market intervention:

• Quantity restrictions or quotas limit how much of a good may be traded or produced. One example is restrictions on land development.
• Price ceilings set a maximum permitted price. Examples include rent control and energy-price caps.
• Price floors set a minimum permitted price. Examples include minimum wages and agricultural price supports.
• Other restrictions may regulate goods such as alcohol to limit consumption for health, moral, or religious reasons.

The supply-and-demand framework can help assess how these policies affect prices, quantities, and the distribution of surplus.

Quotas and Price Ceilings

A binding quota sets a maximum quantity below what the free market would otherwise trade.

• Trades beyond the quota are prevented, so some potential gains from trade are lost.
• The market becomes smaller, with a lower quantity traded and typically a higher price.
• Consumers are worse off in the example discussed.
• Producers lose some surplus from reduced sales but may gain from the higher price, so the overall effect can depend on the market.

A binding price ceiling sets a maximum price below the market-clearing price.

• At the capped price, consumers want to buy more than producers are willing to supply.
• The gap between quantity demanded and quantity supplied is a shortage.
• In the illustrated model, the quantity traded and total gains from trade fall.

A price floor, such as a minimum wage, was introduced as a topic for students to analyze using the same framework.

Applying the Model to Housing

In response to a question about housing shortages, the instructor explained that shortages can arise even without rent control. Possible causes include:

• Zoning or other limits on construction.
• Land banking, in which land is held back from development.
• Local opposition to building (“NIMBYism”).
• Financing constraints that prevent builders from responding to higher prices.

These factors can be represented as a leftward shift in supply or as supply that responds only weakly to rising prices. Policies that make construction more responsive to prices—or remove restrictions on available land—could increase housing supply in the model.

A participant asked whether Airbnb and private-equity purchases could affect housing supply. The instructor said that if homes are removed from the market for ordinary residential use, they can be represented as a reduction in the supply available to that market. This may raise prices and reduce the quantity available to people seeking homes to live in.

Next Session: Macroeconomics and Public Debt

The class voted between continuing with market power and noncompetitive firms or moving to macroeconomics. Macroeconomics won with 59% of the vote.

As an introduction, the instructor showed material on government revenue and spending across a group of 21 economies. He described the relationship between:

• Tax revenue and government spending: When spending exceeds revenue, a government runs a deficit; when revenue exceeds spending, it has a surplus.
• Deficits and borrowing: Governments with deficits borrow, including by issuing debt.
• Debt interest: Governments pay interest on debt, and the burden can be considered relative to the size of the economy.

The instructor said the next session would examine the risks of rising debt and possible spending cuts, including the implications for the arts. In response to a question about Japan’s high debt, he attributed it briefly to a major financial crash around the late 1980s and early 1990s, followed by prolonged borrowing.

Speakers and Sources

• Richard — Instructor; presented the economics material and answered questions.
• Anna — Asked about consumer benefits when prices rise and responded during the demand-shift example.
• Grace — Asked whether surplus increases are proportional between consumers and producers.
• Alicia — Asked whether the quality-based example depended on assumptions about consumer tastes and luxury goods.
• Tanika — Questioned how the instructor was using the term “quality.”
• Leslie — Asked how businesses set prices and how pricing relates to perceived value.
• Lily — Asked whether prices can fall after rising and later asked about Japan’s debt.
• Kathleen — Asked about housing shortages in the United States and the role of housing supply.
• Tiffany — Helped run the class poll on the next session’s topic.
• Other unnamed class participants — Confirmed slide visibility and took part in brief exchanges.

The instructor referred to a small survey he had conducted about willingness to pay for coffee and to class slides showing tax, deficit, debt, and interest comparisons across 21 economies. No named external source was cited in the subtitles.