Midterm 1 Chapter 6 - Price Controls

Midterm 1 Chapter 6 - Price Controls - Chapter 6 Chapter...

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Chapter name Chapter 6 Supply, Demand, and Government Policies Test- 25 mc 5 short answer 1 essay from price controls
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Chapter 6 Study Checklist: Required reading : Course textbook: Chapter 6: whole chapter Miller, Benjamin, & North: Chapter 10: pages 68-73 Chapter 12: pages 82-85 Spurr: Chapter 5: pages 97-100 Online practice quiz questions : Chapter 6: #1-6
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Role of the Government in a Market Economy: Just because prices are freely determined in a market economy does not mean that there should be no government. Government action becomes a potential option when we have market failures. Market failure: A condition that arises when unregulated markets yields socially undesirable results. Causes : externalities, public goods, & market power …however: Government Failure A situation in which the government makes things worse than the market, even though there may be market failures. Just because markets fail, it may also be possible that government intervention may lead to an even worse outcome.
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Supply, Demand, and Government Policies: In a free, unregulated laissez faire (government – hands off) market system, market forces establish equilibrium prices and exchange quantities. Free markets do 2 important things : 1. Allocate resources efficiently, and 1. Sets: Demand = Supply QD = QS –. Market equilibrium: prohibits shortages and surpluses
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Controls on Prices: While equilibrium conditions may be “efficient” , it may be true that not everyone is satisfied Governments have attempted to control market prices if: They were not happy with the outcome of the market, or If pressured by groups that benefit from price controls . This can result in government-created: Price ceilings and price floors . 55
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Controls on Prices: price ceiling A maximum legal price above which a product cannot be sold; to have an impact (to be binding), a price ceiling must be set below the equilibrium price. limits how much a price can rise. Limits how much sellers can charge and receive as payment. price floor A minimum legal price below which a product cannot be sold; to have an impact (to be binding), a price floor must be set above the equilibrium price. It’s illegal for the price to fall below a certain level. sets a minimum price consumers must pay
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How Price Ceilings Affect Market Outcomes: Two outcomes are possible when the government imposes a price ceiling : 1. Price ceiling > Equilibrium price Price control is not binding, nothing happens 2. Price ceiling < Equilibrium price Price control is binding ; shortage –. A shortage occurs in case #2 because: Q D > Q S
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A Market with a Price Ceiling : (a) A Price Ceiling That Is Not Binding Quantity of Apartments in Atlanta 0 Price of Apartmen ts Equilibriu m quanti ty $ 8 00 Pri ce ceili ng Equilibriu m pri ce Deman d Supp ly 6 0 0 1 0 0 The market clears at $600 and the price ceiling is 800 – nothing happens- ineffective
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A Market with a
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