Imperfections Market Factors Affecting Demand: 1. Price of related goods 2. Income or Wealth 3. Expected future prices 4. Tastes and preferences Factors Affecting Supply: 1. Price of related goods 2. Prices of factor inputs 3. Technology 4. Expected future prices Comparative Statics 1. What curve? 2. How affected? 3. New Equilibrium. One more time: Blight on tea crop in Inda Step 1: What curve: blight acts like a change in technology.
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Step 2: Shifts the supply curve to the left, we can say supply shifts left Ptea Tea Market S1 S0
D
Qtea
2/25/08
Wayne Joerding, 2008
Market Imperfections Step 3: Equilibrium price increases and equilibrium quantity decreases. Ptea Tea Market S1 P1 P0 D Q1 Q0 Qtea S0
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We can say increase in equilibrium price causes a decrease in the quantity demanded.
2/25/08
Wayne Joerding, 2008
Market Imperfections Market Imperfections Price Ceilings and Floors
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Definition: A legal limit to the maximum or minimum price for a product or service
A price floor represents a minimum price at which the product or service can be traded. If set above the equilibrium then => excess demand A price ceiling represents a maximum price at which the product or service can be traded. If set below the equilibrium then => excess supply
Example 1: Rent controls Legal maximum price that can be charged for a rental property. If the maximum price for rent is set at Pmax then landlords will only supply Qmax housing. At Pmax, however, people want to consume Q1 quantity of housing, producing an excess demand of Q1Qmax. P P1 S Price ceiling becomes quantity ceiling at Qmax. => excess demand of Q1 -Qmax D Qmax Q1 Q
Pmax
If tenants cant compete on price then must compete in other ways: 1. Searching: willing to spend up to P1-Pmax 2. searching. Black market: pay someone else to find housing or break the law. Thus, tenants could end up paying a total of P1 to get Qmax quantity of housing. People pay higher prices for less consumption.
2/25/08
Wayne Joerding, 2008
Market Imperfections
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Do rent controls have this effect? In 1992; New York City owns more than 150,000 derelict housing units abandoned by their owners. At the same time, excess demand approximately equals 200,000 rental units.
Sales Tax:
Sales taxes can be imposed on the buyer or seller. o Buyer: customer periodically writes check to government. (VAT) o Seller: business operator periodically writes check to government. We almost always impose tax on sellers because of 1. Administrative ease 2. Political costs Politicians and activists usually lobby for making business pay, seeming to imply that this shields consumers. But, many consumers argue that business can just pass on the tax in the form of higher prices. Whos right? Consider the following market with NO TAX:
P S0 P0
Q Q0
2/25/08
Wayne Joerding, 2...