Lecture 8 Feb 6

Lecture 8 Feb 6 - Announcements We will be doing an...

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Announcements We will be doing an experiment in Aplia on Monday – bring your laptops. The experiment itself will not be graded so if you do not have a laptop, don’t worry – just follow along with someone else. Do both “Preparing for Experiment” assignments on Aplia by 11:00am on Monday! This is graded as a homework! iClicker scores for the first few lectures are up on BB. Aplia payment “grace period” ends on Monday! Pay now if you have not. 1 of 23
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EXCESS DEMAND (Shortage). 2 of 23
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3 of 23 THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.
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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good (when a shortage exists) in a free market, the price of the good will rise until quantity supplied equals quantity demanded (until the market clears). 4 of 23
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Lumber Lumber Example from last time. D out and S back made prices increase a lot. Not good for the economy to have prices change so much. What can the government do? 5 of 46 P Q S 1972 D 197 2 A B S 1970 D 197 0 $26.70 $56.76
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Lumber Example The government could try to shift the curves back to where they were before and let the market adjust on its own (move back to a point near the old equilibrium). 1.To shift demand back , the government could increase taxes on new housing projects or put limits or taxes on exports of lumber. 2.To shift supply out , the government could lower tariffs (taxes on imports) or get rid of quotas (limits on imports) on lumber from Canada. 6 of 23
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OR, the government could just put a limit on how much people can charge for lumber. This is called a “price ceiling”. If they do this, there will be a shortage of lumber and the lumber must be rationed somehow (or divided up among the people that want the lumber). 7 of 23
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Lecture 8 Feb 6 - Announcements We will be doing an...

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