Class Notes - 9-17-07

# Class Notes - 9-17-07 - o Government supports the price...

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Microeconomics – Class Notes – 9/17/07 A change in supply to the left when a tax is administered: the vertical distance between the two curves is exact amount of the tax. a. Price Ceiling o An effective price ceiling is set below equilibrium This results in a shortage o Example: Housing Rent Control The quantity demanded at the price exceeds the quantity supplied o Black Market Is an illegal market that allows price to exceed the price ceiling o Lower quality products (apartments) result from keeping price low. o The value of the shortage is: (Quantity demanded)-(Quantity supplied) = shortage b. Price Floor o An effective price floor is set above equilibrium This results in a surplus o Example: Agricultural Milk o Black Market (if the price floor is unsupported by the government) Is an illegal market that allows price to drop below the price floor Farmers might sell products below in order to sell product

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Unformatted text preview: o Government supports the price floor by purchasing the surplus Government cheese – Surplus of milk is converted to a more durable product and then the cheese is given away through soup kitchen…? • Minimum wage is not supported like a surplus is – government does not hire unemployed workers • Numerical Example : o D(initial): P = 6 - .5Q o S(initial): P = 2 + .5Q a. At equilibrium: S = D i. 6 - .5Q = 2 + .5Q ii. 4 = Q(initial) iii. P(initial) + 2 + .5(4) = 4 b. Government implements Price floor = \$5 i. Is effective ii. Surplus c. What is the amount of the surplus? [USE BOTH EQUATIONS: Q(s)-Q(d) ] i. Quantity Supplied 1. Price floor = \$5 = 2 + .5Q Q(s) 2. 3 = .5Q ; Quantity supplied = 6 ii. Quantity Demanded 1. 5 = 6 - .5Q Q(d) 2. 1 = .5Q 3. 2 = Q(d) iii. Total: Q(d)-Q(s) 1. 6 – 2 = 4...
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## This note was uploaded on 04/15/2008 for the course ECON 100 taught by Professor Stephaniemartin during the Fall '07 term at Allegheny.

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Class Notes - 9-17-07 - o Government supports the price...

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