Ch06 - Chapter 6: Markets in Action Objectives: Explain how...

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Chapter 6: Markets in Action Objectives: Explain how housing markets work and how price ceilings create housing shortages and inefficiency Explain how labor markets work and how minimum wage laws create unemployment and inefficiency Explain the effects of a tax Explain why farm prices and revenues fluctuate and how production subsidies and quotas influence farm production, costs, and prices Explain how markets for illegal goods work
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Turbulent Times As more people compete for scarce land, house prices and rents rise. As new technologies replace low-skilled labor, the demand for low-skilled workers falls. Can governments control prices and wages? How do taxes affect prices and quantities, and who pays the tax: the buyer or the seller? How are farm prices and incomes affected by fluctuations in harvests? What happens in a market when trading a good is illegal?
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Housing Markets and Rent Ceilings The 1906 earthquake in San Francisco left 200,000 people—more than half the city—homeless. By the time the San Francisco Chronicle started publishing again, a month after the earthquake, there was not a single mention of a housing shortage. The classified advertisements listed many more houses and flats for rent than the advertisements for houses and flats wanted. How did the market achieve this outcome?
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Housing Markets and Rent Ceilings The Market Response to a Decrease in Supply Figure 6.1 shows the San Francisco housing market before the earthquake. The quantity of housing was 100,000 units and the rent was $16 a month at the intersection of the curves D and SS .
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Housing Markets and Rent Ceilings The earthquake decreased the supply of housing and the supply curve shifted leftward to SS A . The rent increased to $20 a month and the quantity decreased to 72,000 units.
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Housing Markets and Rent Ceilings The long-run supply of housing is perfectly elastic at $16 a month. With the rent above $16 a month, new houses and apartments are built. Long-Run Adjustment
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Housing Markets and Rent Ceilings The building program increases supply and the supply curve shifts rightward. The quantity of housing increases and the rent falls to the pre-earthquake levels (other things remaining the same).
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Housing Markets and Rent Ceilings A price ceiling is a regulation that makes it illegal to charge a price higher than a specified level. When a price ceiling is applied to a housing market it is called a rent ceiling . If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling. But if the rent ceiling is set below the equilibrium rent, it has powerful effects. A Regulated Housing Market
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Figure 6.2 shows the effects of a rent ceiling that is set below the equilibrium rent. The equilibrium rent is
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Ch06 - Chapter 6: Markets in Action Objectives: Explain how...

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