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Macroeconomics Notes 3-3-08

Macroeconomics Notes 3-3-08 - Macroeconomics Notes Examples...

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Macroeconomics Notes 3/3/08 Examples of Government Interference in the Market - Support Programs and Subsidies o If the market is disturbed, the market will handle the problem itself (self- correcting mechanism; all markets have this feature) This feature is one argument people use to justice laissez-faire economics However, the problem is the length of time it takes for the market to correct itself People will eventually get frustrated and the government will step in to fix things, such as imposing a price ceiling (maximum price/price controls) o This leads to shortages, which in turn leads to the rise of black markets, bribery, hoarding, and so on o The government can also impose minimum prices on the economy (price floors) A particular one is agricultural support prices Example: wheat o There are lots of buyers and sellers of wheat on the market o Farmers might find themselves hurt by their own productivity because if a lot of wheat is available it will drive prices down, resulting in lower income o A bushel is $1.50, and the government steps in and guarantees you $3 a bushel This will cause more production, resulting in a surplus o LEMMA: if a government forces farmers to accept a price below the market price, they will under-produce, resulting in a shortage of the commodity
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