ch04_condensed - Micro 101 Chapter 4 1 Chapter 4 Objectives 1 Explain consequences of government interventions like price ceilings price floors and

# ch04_condensed - Micro 101 Chapter 4 1 Chapter 4 Objectives...

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Micro 101, Chapter 4 1 Chapter 4 Objectives: 1. Explain consequences of government interventions like price ceilings, price floors, and excise taxes 2. Calculate various types of elasticities and interpret 3. Describe how price elasticity helps predict how total expenditure changes if P changes 4. Use income elasticity to identify normal goods, inferior goods, necessities, and luxuries 5. Use cross-price elasticity to identify complements and substitutes
Micro 101, Chapter 4 2 Recall market for eggs: • suppose price of eggs 10 cents/ dozen - suppliers willing to produce less than buyers wish to purchase - would have a shortage, “excess demand” - leads to queues - not a stable situation: upward pressure on price • at P=10 cents, Q D = 5 > Q S = 1.5 - excess demand • amount sold is 1.5, not an equilibrium Excess Demand for Eggs 0 0.1 0.2 0.3 0.4 0.5 0 1 2 3 4 5 6 7 8 Q P
Micro 101, Chapter 4 3 Opposite problem with “price _______”: • leads to excess supply • initial equilibrium at hours=_____, wage=\$___ / hr • suppose government imposes a minimum wage at \$6 /hour (“price floor”) • firms’ demand for labor falls to _____ hours - unemployment of low-wage workers - only workers retained are those worth at least \$____ • same effect with well-intentioned ___________ • note: a price floor (or ceiling) may not be “binding”: -i.e., a price floor has __________ on the economy if it is set below the equilibrium price - a price _________ has no effect on the economy if it is set above the equilibrium price Minimum Wage: Excess Supply of Labor 0 2 4 6 8 10 0 20 40 60 80 100 labor hours wage rate
Micro 101, Chapter 4 4 • implications of a shortage (e.g., from price ceiling): (1) formation of queues (lines) - increases economic cost to the consumer (2) formation of __________ markets (“black markets”) - ____________ at higher prices - potentially enhances efficiency: gets commodity into hands of those who _________ it the most (unlike price controls) (3) _________ and _________ become part of price ex. price ceilings in WWII (a) max legal price for new car: \$1400 - suppose you have used car worth \$500 - dealer pays you \$100 for it - “effective price” of new car is \$_______ - violates spirit of the law (b) wage freeze health insurance paid as fringe benefit ex. Israeli __________ on rental units landlords charge \$____ per key (3) facilitates _________________ - rent controlled apartments - excess D landlords choose who to rent to based on personal _________
Micro 101, Chapter 4 5 Back to price __________: Usury law in TexArkanas Consequences of usury laws: - ____________ in loanable funds market