Chapter_5

Chapter_5 - • Price controls • Price ceiling maximum...

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Chapter 5 Using Supply and Demand Examples Harder: The problem of Ambiguity Mac and cheese is an inferior good Recession Incomes decrease Buyers are affected Demand increases --> price increases--> quantity equilibrium increases Mac and cheese workers wage increases Profitability decreases Sellers are affected Supply decreases--> price increase--> quantity equilibrium decreases Total Change: Price (unambiguously) increases Quantity equilibrium is ambiguous because on increases and the other decreases It depends upon which change is greater If there are two changes one in supply and one in demand, there will always have either price or quantity be clear and the other one will be ambiguous If there are two changes on the same side and in the same direction (increase or decrease) , there is no ambiguity If there are two changes on the same side and in opposite directions, there is complete ambiguity
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Unformatted text preview: • Price controls • Price ceiling - maximum price allowable • Binding (i.e. effective) • Ceiling is only binding if P Ceiling < P* • P ceiling is set below the market equilibrium • Causes a shortage • Selling now becomes the restriction • Non-binding (i.e. ineffective) • Price ceiling is only helpful for those buyers that can still find a seller • Price floor - minimum price allowable • Binding (i.e. effective) • P floor is binding if P floor > P* • P floor is set above the market equilibrium • Causes a permanent surplus • Buying now becomes the restriction • Non-binding (i.e. ineffective) • Quantity restriction - maximum quantity allowable • If a quantity restriction is set below the market equilibrium, which causes the new market equilibrium to be higher in price but restricted in supply...
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Chapter_5 - • Price controls • Price ceiling maximum...

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