Chapter 6 -- Carlos Pitta

Chapter 6 -- Carlos Pitta - Chapter 6 Supply, Demand, and...

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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 1 Chapter 6 Supply, Demand, and Government Policies Instructor: Carlos Pitta
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 2 In this chapter, look for the answers to these questions: What are price ceilings and price floors? What are some examples of each? How do price ceilings and price floors affect market outcomes? How do taxes affect market outcomes? How does the outcome depend on whether the tax is imposed on buyers or sellers? What is the incidence of a tax? What determines the incidence?
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 3 Government Policies That Alter the Private  Market Outcome Price controls Price ceiling : a legal maximum on the price of a good or service. Example: rent control. Price floor : a legal minimum on the price of a good or service. Example: minimum wage. Taxes The govt can make buyers or sellers pay a specific amount on each unit bought/sold. We will use the supply/demand model to see We will use the supply/demand model to see how each policy affects the market outcome how each policy affects the market outcome (the price buyers pay, the price sellers receive, (the price buyers pay, the price sellers receive, and eq’m quantity). and eq’m quantity).
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 4 EXAMPLE 1:    The Market for Apartments Eq’m w/o price controls P Q D S Rental price of apts $800 300 Quantity of apartments
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 5 How Price Ceilings Affect Market Outcomes A price ceiling above the eq’m price is not binding it has no effect on the market outcome. P Q D S $800 300 Price ceiling $1000
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 6 How Price Ceilings Affect Market Outcomes The eq’m price ($800) is above the ceiling and therefore illegal. The ceiling is a binding constraint on the price, and causes a shortage. P Q D S $800 Price ceiling $500 250 400 shortage
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 7 How Price Ceilings Affect Market Outcomes In the long run, supply and demand are more price-elastic. So, the shortage is larger. P Q D S $800 150 Price ceiling $500 450 shortage
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CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 8 Shortages and Rationing With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms: (1) long lines (2) discrimination according to sellers’ biases These mechanisms are often unfair, and inefficient: the goods don’t necessarily go to the buyers who value them most highly. In contrast, when prices are not controlled,
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Chapter 6 -- Carlos Pitta - Chapter 6 Supply, Demand, and...

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