CHAPTER 4 - CHAPTER 4 Applications of the Model of Demand...

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CHAPTER 4 Applications of the Model of Demand & Supply
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Government Interventions in Pricing Price Ceilings Price Floors the government can set maximum or minimum prices (by law)
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Interventions in Pricing: Price Floors/Price Supports Price Supports/Price Floor If the gov‘t thinks prices are too low legally establish a minimum price (price support) above the equilibrium price Common example: agriculture (price supports for agricultural products, e.g. milk)
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Interventions in Pricing: Price Floors/Price Supports
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Interventions in Pricing: Price Floors/Price Supports Result: surpluses accumulate if the price support is supposed to hold, Other common example of price support: minimum wage (may result in unemployment = „surplus of workers“)
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Interventions in Pricing: Price Ceilings Price Ceilings If gov‘t thinks that prices are too high set a maximum price (price ceiling) below the equilibrium price Examples: certain food products (bread, beef, butter,. ..), sometimes gasoline Other example: rent ceilings (e.g. in NYC)
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Interventions in Pricing: Price Ceilings
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Interventions in Pricing: Price Ceilings Result: shortage Another by-product: secondary rationing devices = non-price condition that supplements the primary rationing condition (price) coupons, queuing,. ..
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Other ways of gov‘t intervention in markets Subsidies Excise Taxes
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Subsidies Subsidy = payment to producers or consumers for each unit of output they produce/purchase Examples: agriculture (grains), medical services, education,. .. Intention: encourage production/consumption
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CHAPTER 4 - CHAPTER 4 Applications of the Model of Demand...

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