Class02_4 - 02/04/2008 Class Notes (cover part of Chapter 6...

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02/04/2008 Class Notes (cover part of Chapter 6 in the textbook) Class Outline Price Controls: 1. Price Ceilings 2. Price Floors Price Controls Def . Price Ceiling A price ceiling is a regulation that makes it illegal to charge a price higher than a specified level. Ex. Rent Controls, Salary caps. Def . Price Floor A price floor is a regulation that makes it illegal to charge a price lower than a specified level. Ex. Minimum wage, Farm price support 1. Price Ceiling (Max legal Price) Example: Housing market and rent ceiling Consider the housing market as represented by: 4 4000 'Demand Function' 800 'Supply Function' d s q p q p = - + = - In equilibrium: 4 4000 800 * $960 * 160 s d q q p p p q = - + = - = = 1
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In equilibrium: CS*= $(1000 960)*160 $3,200 2 - = PS*= $(960 800)*160 $12,800 2 - = Total Surplus*= CS*+PS*= $16,000 Now, suppose the government intervenes and sets a rent ceiling at p ceil = $900 At p ceil =$900 q d =400 > q s =100 A price ceiling induces a shortage in the market
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This note was uploaded on 04/29/2008 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

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Class02_4 - 02/04/2008 Class Notes (cover part of Chapter 6...

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