Chapter 4 - SUMMARY chapter: 4 > MarketStrikesBack 1 of 35...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
1 of 35 SUMMARY chapter:   4 >> Market Strikes Back
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 of 33 WHAT YOU WILL LEARN IN THIS CHAPTER: The meaning of price controls and quantity controls , two kinds of government interventions in markets. How price and quantity controls create problems and can make a market inefficient. Why the predictable side effects of intervention in markets often lead economists to be skeptical of its usefulness. Who benefits and who loses from market interventions, and why they are used despite their well-known problems.
Background image of page 2
3 of 33 Why Governments Control Prices The market price moves to the level at which the quantity supplied equals the quantity demanded. BUT this equilibrium price does not necessarily please either buyers or sellers. Therefore, the government intervenes to regulate prices by imposing price controls , which are legal restrictions on how high or low a market price may go. Price ceiling is the maximum price sellers are allowed to charge for a good or service. Price floor is the minimum price buyers are required to pay for a good or service.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 of 33 Price Ceilings Price ceilings are typically imposed during crises— wars, harvest failures, natural disasters—because these events often lead to sudden price increases that hurt many people but produce big gains for a lucky few. Examples: U.S. Government imposed ceilings on aluminum and steel during World War II Rent control in New York
Background image of page 4
5 of 33 The Market for Apartments in the Absence of Government Controls 1.6 1.7 0 1.8 1.9 2.0 2.2 2.1 2.3 2.4 $1,400 1,300 1,200 1,100 1,000 900 800 700 600 Quantity of apartments (millions) Monthly rent (per apartment) D E S $1,400 1,300 1,200 1,100 1,000 900 800 700 600 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 1.6 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 Quantity supplied Quantity demanded Monthly rent (per apartment) Quantity of apartments (millions)
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 of 33 The Effects of a Price Ceiling 1.6 0 1.8 2.0 2.2 2.4 $1,400 1,200 1,000 800 600 Quantity of apartments (millions) Monthly rent (per apartment) D S E B A Housing shortage of 400,000 apartments caused by price ceiling Price ceiling
Background image of page 6
7 of 33 How Price Ceilings Cause Inefficiency Inefficiently Low Quantity Inefficient Allocation to Customers Wasted Resources Inefficiently Low Quality Black Markets
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 of 33 A Price Ceiling Causes Inefficiently Low Quantity 1.6 0 1.8 2.0 2.2 2.4 $1,400 1,200 1,000 800 600 Quantity of apartments (millions) Monthly rent (per apartment) D S E Price ceilin g Quantity supplied with rent control Quantity supplied without rent control
Background image of page 8
9 of 33 How Price Ceilings Cause Inefficiency Price ceilings often lead to inefficiency in the form of inefficient allocation to consumers : people who want the good badly and are willing to pay a high price don’t get it, and those who care relatively little about the good and are only willing to pay a low price do get it. Price ceilings typically lead to inefficiency in the form of wasted resources : people expend money, effort and time to cope with the shortages caused by the price ceiling.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/04/2011 for the course ECON 2006 at Virginia Tech.

Page1 / 33

Chapter 4 - SUMMARY chapter: 4 > MarketStrikesBack 1 of 35...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online