Ch06 - Chapter 6: Markets in Action I. Housing Markets and...

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C h a p t e r 6 : M a r k e t s i n A c t i o n I. Housing Markets and Rent Ceilings A. The 1906 San Francisco earthquake in left 200,000 people homeless, yet the housing shortage vanished in one month. B. The Market Before and After the Earthquake 1. The short run supply curve shows the change in the quantity of housing supplied as the rent changes in the short run as the number of houses and apartments remains constant. Figure 6.1a shows that the earth shifted the short-run supply curve of housing leftward. After the earthquake, at the initial rent there was a shortage of housing. 2. A new, short run housing market equilibrium appeared in which the initial shortage of housing was eliminated by a rise in rents and an increase in the quantity of housing supplied moving up along the new, short run supply curve. 3. The long run supply curve reflects the quantity of housing that is available when enough time has elapsed for new housing to be built. In the long run, the supply of housing increased and the short-run supply curve shifted rightward, as shown in Figure 6.1b. 4. The long-run supply curve is perfectly elastic, so the long-run equilibrium price and quantity are the same as the pre-earthquake values (other things remaining the same). C. A Regulated Housing Market 1. A price ceiling is a regulation that makes it illegal to charge a price higher than a specified level. 2. When a price ceiling is applied to a housing market it is called a rent ceiling . a) If the rent ceiling is set above the equilibrium rental price for housing, the market attains the equilibrium price and quantity as if there were no ceiling. b) If the rent ceiling is set below the equilibrium rental price for housing, the quantity of housing demanded by renters exceeds the quantity of housing supplied by landlords, resulting in a shortage of rental housing. 3. Because landlords cannot be forced to supply a greater quantity than they wish, the quantity of housing supplied at the rent ceiling is less than the quantity that would be supplied in an unregulated market. 4. Because the legal price cannot eliminate the shortage, other mechanisms operate. This results in increased search activity and encourages black markets to develop. D. Search Activity 1. The time spent looking for someone with whom to do business is called search activity . a) When a price is regulated and there is a shortage, search activity necessarily increases. b) Search activity is costly—the opportunity cost of housing equals its rent (regulated) plus the opportunity cost of the search activity (unregulated). 2. Because the quantity of housing is less than the quantity in an unregulated market, the opportunity cost of housing exceeds the unregulated rent—see Figure 6.2. E.
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Fall '08 term at Temple.

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Ch06 - Chapter 6: Markets in Action I. Housing Markets and...

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