Lecture7--PRICESYSTEMANDGOVERNMENT

Lecture7--PRICESYSTEMANDGOVERNMENT - Semper Economicus! The...

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Unformatted text preview: Semper Economicus! The Price System and Government How political intervention in markets affects market outcomes Price Controls in Market Economies Price ceilings and floors are prices set and controlled by governments s A price ceiling sets a maximum price that sellers can charge for a good or service s Price floors require a minimum price to be paid for a good or service s How Rent Control Works as a Price Ceiling s s If the rent ceiling is Supply set below the Demand equilibrium rent, quantity demanded 600 increases and quantity supplied 300 declines The result is a shortage shortage of apartments QS Qe QD Apartments Rent ($ per month) Minimum Wages are an Example of a Price Floor Wage s s If the minimum wage is above the equilibrium wage the quantity of labor supplied increases but the quantity demanded declines The result is a surplus of labor (unemployment) Supply Demand 7 5 Surplus QD Qe QS Unskilled Labor Minimum Wages are an Example of a Price Floor Wage s s If the minimum wage is below the equilibrium wage it has no effect on the 7.50 market Employers who try 6.55 to pay the minimum wage will not succeed in hiring workers Supply Demand Qe Unskilled Labor Agricultural Price Supports are another example of a Price Floor s s Price floors above equilibrium price result in agricultural 2 surpluses The government 1.50 usually purchases surplus commodities to keep them off the market Price ($ per gallon) Supply Demand Surplus QD QS Milk per year Agricultural Price Supports are another example of a Price Floor s s s s Taxpayers must pay the cost of buying surplus commodities 2 In this case the cost is $2 (2 million) = 1.50 $4 million Consumers pay higher prices Producers enjoy higher incomes Price ($ per gallon) Supply Demand Surplus 1 3 Millions of Gallons of Milk per year Centrally Planned, Command Economies s s Throughout much of the 20th century communist regimes controlled economic resources through state ownership and central planning Free markets were not permitted in these command economies Y x How Command Economies Worked s s The State owned productive resources and controlled the means of production Planners decided what to produce, how to produce it, and fixed prices and incomes Prices were not set through markets s s Plans often emphasized military and heavy industry neglecting consumer goods. Prices were lower than equilibrium levels for many basic items resulting in shortages Price (Rubles) Demand Fixed Supply 50 20 Shortage QS QD Bread Prices were not set through markets s For some products prices were too high resulting in surpluses Price (Rubles) Fixed Supply 50 20 Surplus Demand QD QS Stinky canned fish ...
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This note was uploaded on 10/13/2008 for the course EC 205 taught by Professor Hymen during the Fall '08 term at N.C. State.

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