CHAP 6 & 7 - Markets in action & Utility and demand

CHAP 6 & 7 - Markets in action & Utility...

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Unformatted text preview: CHAP 6 & 7: CHAP 6 & 7: Markets in action & Markets in action & Utility and demand Utility and demand Olivier Giovannoni 304K: Introduction to microeconomics Sept 24, 2007 Outline Outline Markets in action: 1- Price ceilings: Housing market and rent controls 2- Price floors: Labor market and minimum wage 3- Economic effects of taxes Utility and demand 4- Budget constraints 5- Preferences and utility maximization 6- Implications of utility maximization CHAP 6 & 7 slide # 2 MARKETS IN ACTION MARKETS IN ACTION Introduction Introduction Recall two graphs: CHAP 6 & 7 slide # 4 price quantity Demand supply surplus If p>p * , supply is larger than demand and there is a surplus of goods surplus shortage If p<p * , demand is larger than supply and there is a shortage of goods CHAP 6 & 7 slide # 5 p q Inefficient market with a price set too high: reduced surpluses for everyone and underproduction underproduction $2 $3 Deadweight loss 1- Price ceilings: rent control 1- Price ceilings: rent control In perfectly competitive markets prices adjustments bring S and D together in equilibrium, thus assuring max. “well being” to individuals and society as a whole. This is the efficiency and fairness of the free market. When prices are not free to adjust this leads to shortages (or surpluses) and deadweight losses for society. This provides market inefficiency but, sometimes, greater fairness. Let’s take two examples of regulated (not free prices): rent controls and the minimum wage. CHAP 6 & 7 slide # 6 1- Price ceilings: rent control (cont.) 1- Price ceilings: rent control (cont.) Rent controls are price ceilings put in place by cities to make apartments more affordable. CHAP 6 & 7 slide # 7 apartment quantity rent Demand for apartments Supply of apartments Housing shortage rent ceiling “no more than $800 for a 1BR” The rent control makes the equilibrium unreachable. There is a housing shortage, e.g. for the people who are willing to pay $1300 for a 1BR in downtown Austin. Deadweight loss 2- Price floor: min. wage 2- Price floor: min. wage The minimum wage is a minimum wage put in place by gov ts to raise the lowest wages....
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CHAP 6 &amp; 7 - Markets in action &amp; Utility...

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