Micro.Week3.2007 - 3/1 REVIEW Prices play a critical role in allocating resources An increase in demand leads to an imbalance between what buyers

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3/1 REVIEW: Prices play a critical role in allocating resources An increase in demand leads to an imbalance between what buyers want to buy and what sellers want to sell / WE CALL THIS EXCESS DEMAND The rise in price that results does two things: 1. It calls forth additional units of supply: it does this by causing producers to want to produce more output in order to make profit This moves resources into this industry INVISIBLE HAND 2. It causes buyers to ration the amount that they buy
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3/2 ECONOMISTS LIKE THIS MECHANISM 1. Price serves as a very efficient signal to both buyers and sellers. 2. The rationing mechanism is quite a good one (those who “really” want the good get it, those who don’t really want it look elsewhere) 3. The supply side response is just what we would want. BUT the rationing mechanism tends to mean that the rich are the ones who get the good, if they want it People often think this is unfair, and want the government to do something about it.
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3/3 This leads us to general issue of price restrictions. People buy stuff, don’t like high prices Why not just impose lower price by law? Called PRICE CEILING diagram: 1. Effective only if P C < P * 2. Causes ED 3. Leaves unresolved the issue of Who gets Q S ?? rationing - “black market” seller preference queuing - “first come first served”
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3/4 eg. Rent Controls leads to all problems above, PLUS in long run / no new construction if prices set too low for profits / landlords don’t maintain units / “best way to destroy housing stock of city short of bombing” / no one can move, so end up with wrong housing Notice, in long run, supply and demand curves tend to be flatter than in short run: BUT / does lower prices for those in housing
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Also, sometimes demand for gov’t to raise prices / eg. for farmers, or wages for workers Called PRICE FLOOR diagram: 1. Effective only if P F > P * 2. Causes ES 3. Leaves unresolved the issue of Who gets to sell Q
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This note was uploaded on 06/13/2011 for the course ECON A04 taught by Professor Mk during the Spring '07 term at University of Toronto- Toronto.

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Micro.Week3.2007 - 3/1 REVIEW Prices play a critical role in allocating resources An increase in demand leads to an imbalance between what buyers

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