Mankiw - Chapter_06 - Chapter 6 Supply, Demand, and...

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1 Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics Chapter 6 Supply, Demand, and Government Policies 6.1 Introduction z We are going to analyze various types of government policy using only the tools of supply and demand. z We begin by considering policies that directly control prices , and then consider the impact of tax . 6.2 Controls on prices Definitions: z Price ceiling (for buyers) is a legal maximum on the price at which a good can be sold. z Price floor (for sellers) is a legal minimum on the price at which a good can be sold 6.2.1 How price ceiling affect market outcomes z When an equilibrium price is below the price ceiling, the ceiling is not binding ; z When an equilibrium price is above the price ceiling, the ceiling is a binding constraint on the market. [Figure 1]
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2 Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics z When a shortage of the good develops because of its price ceiling, some mechanism for rationing the good will naturally develop: ± Long lines (inefficiency because of waste of buyers’ time) ± Rationing by sellers (discrimination with their personal biases; inefficient, unfair) ± By contrast, the rationing mechanism in a free, competitive market is both efficient and impersonal. (i.e., free markets ration goods with prices ) z A general result with the policy of price ceiling: When the government imposes a binding price ceiling on a competitive market , a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers . [Case study] Lines at the gas pump [Case study] Rent control in the short run and long run 6.2.2 How price floors affect market outcomes z The price floor is a binding constraint on the market when an equilibrium price is below the floor. z A binding price floor causes a surplus (excess supply ): some sellers are unable to sell all they want at the market price (personal biases of buyers would dominate market trades) z By contrast, in a free market, the price serves as the rationing mechanism , and sellers can sell all they want at the equilibrium price.
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Mankiw - Chapter_06 - Chapter 6 Supply, Demand, and...

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