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Chapter 5

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4 views

Chapter 5

lecture notes

Uploaded by

sosebo6954
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Government controlled prices

Control price at which product must be bought and sold in domestic market

Attempt to hold price at disequilibrium value

Hold market price below equilibrium value creates shortage at controlled price

Disequilibrium prices

Voluntary market transaction require both buyer and seller

Ex. At particular price, quantity demanded less than quantity supplied, demand will
determine amount actually exchanged

Ex. At particular price, quantity supplied less than quantity demanded, supply will
determine amount actually exchanged

Price floor

Price floor : minimum price that can be charged for particular or service

Price floor set at or below equilibrium has no effect because free market equilibrium remains
attainable.

Price floor above equilibrium, will raise price, said to be binding

Established by rules to make it illegal to sell product below price

Ex. Minimum wage

Government can establish price floor by guarantee feature of income support policies

Consequence of excess supply differ from product to product

Labor services, subject to minimum wage, excess supply means unemployment

Surplus wheat accumulate in government warehouse

Government implement policy for people succeed in selling products at price floor better off
than accepting lower equilibrium prices

Price ceiling

Maximum price which goods and services can be legally exchanged

Price ceiling set above equilibrium price, no effect because free market equilibrium remains
attainable

Price ceiling set below free market equilibrium price, price ceiling lowers price and said to be
binding.

Binding price ceilings lead to excess demand, with quantity exchanged being less than in free
market equilibrium
Instead of first come first serve and hoarding, government can ration product

Creates ration to match quantity supplied at price ceilings

Can be rationed through age, family status or occupation

Government goals of imposing price ceilings

Restrict production

Keep prices down

satisfy notations of equity in consumption of product that is temporarily short in supply

ex. Building supplies following natural disaster

black market : products sold at prices that violate legal price control

profit can be made by buying at controlled price and selling at black market price

rent control

specific price ceiling

shortage of rental housing because quantity demanded exceeds quantity supplied

shortage leads to alternative allocation scheme

black markets appear

short run supply curve for rental is inelastic

long rung supply curve of rental is elastic

gains

existing tenants gain in rent controlled environment

losses

landlords suffer because they don’t get same rate of return

potential future tenants

housing shortage hurt them because there will be no place to rent

policy alternatives

rent control meant to protect lower income tenants against profiteering by landlords and
against rising cost of housing

binding rent control create housing shortage

removed if government subsidizes housing production or produces public housing at tax


payer’s cost
can also provide income assistance

output quotas

when government introduces quota, restricts total output of product and decreases supply and
demand increases

shows loss of economic surplus

if demand for product inelastic, producer’s incomes rise.

Output falls, production costs are reduced

Producers must incur high cost to purchase quota

Cautionary word

Redistribution between sellers and buyers

Reduction in economic surplus generated in market

Outcome inefficient and society is made off worse

Government intervention in free market leads to inefficiency

Government policy motivated by desire to help specific group and overall costs deemed to be
worthwhile price to achieve effect

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