packet 3 - PRINCIPLES OF MICROECONOMICS ECON 221 FALL 2009...

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PRINCIPLES OF MICROECONOMICS ECON 221 FALL 2009               Owww! This is some heavy stuff! LECTURE NOTES: Chapters 6,7,13 PROFESSOR:         CHANDINI SANKARAN     Division of Business and Economics 234
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Prof. Sankaran ECON 221                             University of South Carolina  S UPPLY , D EMAND , AND G OVERNMENT P OLICIES Chapter 6 1. In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. Everyone in a market will not always be happy with the equilibrium price. Some buyers will not be able to afford the market-clearing price and some producers will complain that they’ll go out of business at the market-clearing price. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. For that reason, buyers and sellers will both lobby to the government to control prices. ‘Make-believe example ’: The equilibrium price of ice cream is $3. The American Association of Ice Cream Eaters complains that the price is too high. The National Organization of Ice Cream Makers complains the price is too low. The AAICE will lobby for a price ceiling, while the NOICM will lobby for a price floor. 2. PRICE CONTROLS are usually enacted when policymakers believe the market price is unfair to buyers or sellers and result in government-created price ceilings and floors. A. PRICE CEILINGS : Maximum legal prices a seller may charge for a product or service; they have been established historically to enable consumers to obtain some “essential” good or service that they could not afford at the market equilibrium price. Two outcomes are possible when the government imposes a price ceiling: i) The price ceiling is not binding if set above the equilibrium price. GRAPH OF A NON-BINDING PRICE CEILING Outcomes:    ii) The price ceiling is binding if set below the equilibrium price, leading to a shortage. At the lower price, quantity demanded would exceed quantity supplied and there will be  a shortage of the good; and sellers must ration the scarce goods among the large  number of potential buyers.   GRAPH OF A BINDING PRICE CEILING Outcomes of a binding price ceiling:    
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Prof. Sankaran ECON 221   iii) Examples: 1. Rent control in New York City. The goal of rent-control policy is to help the poor by making housing more affordable. GRAPH OF RENT CONTROL Outcomes of Rent Control:       2. Price regulation on gasoline: The gas shortages and long lines at the gas pump in 1973-1974 were in part caused by the price ceiling imposed by lawmakers on oil companies. Had the market been able to adjust fully to the supply changes caused by OPEC, there would not have been shortages, only higher prices. GRAPH OF PRICE CEILING ON GAS
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This note was uploaded on 06/23/2011 for the course ECON 221 taught by Professor Gordanier during the Fall '08 term at South Carolina.

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packet 3 - PRINCIPLES OF MICROECONOMICS ECON 221 FALL 2009...

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