econ1_week4

econ1_week4 - 1 Chapter 6 Supply, Demand and Government...

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Unformatted text preview: 1 Chapter 6 Supply, Demand and Government policies. 1. Price controls Price ceiling: A legal maximum on the price of a good or service. Price floor : A legal minimum on the price of a good or service. 2. Taxes Price ceiling Lets suppose that buyers were successful and the government imposes a price ceiling. Two outcomes are possible. Example: Rent control 1. Price ceiling is not binding P Q P Q Econ 1 Fall 2008 Week 4 2 2. Price ceiling is binding How the sellers respond to the price ceiling when it is a binding constraint Analyzing the policy Rationing mechanisms are often unfair, and inefficient: the goods dont necessarily go to the buyers who value them most highly. P Q P Q 3 Price floor Lets suppose that government imposes minimum on the price of a good or service. Two outcomes are possible. Example: The minimum wage. 1. Price floor is not binding 2. Price floor is binding How the sellers respond to the price ceiling when it is a binding constraint W L W L W L W L 4...
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econ1_week4 - 1 Chapter 6 Supply, Demand and Government...

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