Microeconomics Chapter5 Econ 2106
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This 7 page Class Notes was uploaded by Daria Trikolenko on Monday September 26, 2016. The Class Notes belongs to Econ 2106 at Georgia State University taught by Carycruz Bueno in Fall 2016. Since its upload, it has received 10 views.
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Date Created: 09/26/16
Chapter 5. Price Controls When do price matter? Price controls- an attempt to set prices though government in the market. Price ceiling creates a legally established maximum price for a good or service. Black markets- illegal markets that arise when price controls are in place. Happens when there is a price no more than particular sum, quantity demanded increase and quantity supplied falls. Effect of price ceiling Nonbinding price ceiling Nonbinding- when a price ceiling is above the equilibrium price. Binding price ceiling Binding- when a price ceiling is below the market price, prevents supply and demand from clearing the market. Once the ceiling price is in place, sellers cannot legally charge prices above the ceiling, so incentive to produce along the original supply curve vanishes. Price ceiling in the long run Supply curve is more elastic (flatter). Quantity supplied grows smaller. Demand curve is more elastic (more people will buy product at lower price), consumer will find empty shelves. Quantity demanded of cheap product will increase. As shortage become acute, consumer will find substitutes, without control price. Effects of ceiling on economic activity Rent control Under rent control, a local government caps the price of apartment’s rental to keep housing affordable. Rent controls limit the price a landlord can charge a tenant for rent, require to provide basic services. With ceiling prices, rent control causes a shortage since the quantity demanded in the short run is greater than quantity supplied in the short run. Price Gouging Price gouging laws, places a temporary ceiling on the prices that sellers can charge during times of national emergency until markets function normally again. When the demand for necessities is high, the price rises to ensure that the available units are distributed to those who value them the most. Whenever a price ceiling is binding, it creates a shortage. When do price floor matter? Price floors- create legally established minimum prices for food or services. Since every product that is produced but not sold, seller will want to lower their prices enough to get more sales, without waste. They will offer illegal discount to recoup the cost. International treaties ban the practice of dumping surplus production, but it continuous under the guise of humanitarian aid. The effect of price floors Nonbinding price floors- minimum price below the equilibrium price. Binding price floor – minimum price above the market equilibrium. Quantity supplied will exceed the quantity demanded. Price floors in the long run Supply and demand curve more elastic, since price floor remains in place over time. The increased elasticity on the part of both producers and consumers: 1) Makes the surplus larger in the long run; 2) Magnifies the unintended consequences. Effect of price floors on economic activities A minimum wage- the lowest hourly wage rate that firms may legally pay their workers. Workers could be: - Skilled or unskilled ; - Experienced or unexperienced. Minimum wage functions as a price floor. Higher minimum wages will lower the quantity of labor demanded. Businesses want to keep costs down, so in long run they will try to reduce the amount they spend on labor. (Reduce customer’s service, replace workers with machinery, shorten work day) In long run minimum wades creates two unintended consequences: - smaller demand for workers; - A larger supply at workers looking for those previously existing jobs. The minimum wage is often nonbinding An increase in the minimum wage from $7 to $9 remains nonbinding. It will not change the demand for labor or the unemployment rate. If the minimum wages above the market wage additional unemployment will occur.
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