L3 - Economics 101:Principles of Microeconomics Professor...

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1 Economics 101:Principles of Microeconomics Professor Jo Hertel Lecture 3: Government intervention Recap: Market equilibrium Market intervention by the government Price floors Quotas Taxes Prohibiting markets
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2 Short recap: Market equilibrium A market equilibrium is a price at which the quantity supplied is exactly equal to the quantity demanded. At prices above/ below the equilibrium price, market forces push towards the equilibrium. price quantity supply S demand D E surplus price quantity supply S demand D E p e q e
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3 Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Definition Government interventions (i): Price controls A price ceiling is a maximal price set by the government, above which prices may not rise. Rent control in NYC, gasoline in the 1970’s A price floor is a minimal price set by the government, below which prices may not fall. minimum wage, agricultural products in the US and EU
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4 Price ceilings (1) A price ceiling below the equilibrium price is binding: it keeps the price too low . A price ceiling above the equilibrium price has no effect . (It is called nonbinding). price quantity S D E p e p c price quantity S D E shortage p c p e don’t get confused!
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5 Price ceilings (2): rent control example The equilibrium price is $1150. Rent ceiling is $800. At $800: demand is 2.0 mio. apartments supply is 1.5 mio apartments rent quantity (in mio.) supply S demand D E shortage 800 1200 1600 2000 1.2 1.4 1.6 1.8 2.0 2.2 shortage: q D -q S =2 - 1.5 = 0.5 mio
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6 Price floors (1) A price floor above the equilibrium price is binding: it keeps the price too high . A price floor below the equilibrium price has no effect . (It is called nonbinding). price quantity S D E surplus p e p f price quantity S D E p f p e don’t get confused!
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7 Price floors (2): minimum wage example The equilibrium wage is $3.75.
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