Lecture_6 - Lecture 6 MARKETS IN ACTION SUPPLY, DEMAND,...

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Lecture 6 MARKETS IN ACTION
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SUPPLY, DEMAND, GOVERNMENT POLICIES In a free, unregulated market, market forces or market powers establish equilibrium prices and quantities. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. One of the roles of economists is to use their theories to assist in the development of policies.
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Controls on Prices Price ceiling A legal maximum on the price at which a good can be sold. Price floor A legal minimum on the price at which a good can be sold. Example: Canadian Association of Ice-cream Eaters, and National Organization of Ice-cream Producers
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Controls on Prices Price ceiling A price ceiling is set above the equilibrium. (a) A Price Ceiling That Is Not Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium quantity $4 Price ceiling Equilibrium price Demand Supply
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Controls on Prices Price ceiling A price ceiling is set below the equilibrium. Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply 2 Price ceiling Shortage 75 Quantity supplied 125 Quantity demanded Equilibrium price $3
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Controls on Prices Price ceiling A price ceiling is set above the equilibrium market forces naturally move the economy to the equilibrium, and the price ceiling has no effect. A price ceiling is set below the equilibrium The forces of supply and demand cannot move the price toward equilibrium. A shortage in quantity. A “black” market
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Housing market with a rent ceiling When a price ceiling is applied to a housing market, it is called a rent ceiling . A rent ceiling has no effect if it is set above the equilibrium. A rent ceiling is set below the equilibrium would create A housing shortage Increased in search activity A black market
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Housing market with a rent ceiling (a) Rent Control in the Short Run (supply and demand are inelastic) Quantity of Apartments 0 Supply Controlled rent Rental Price of Apartment Demand Shortage
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Housing market with a rent ceiling (b) Rent Control in the Long Run (supply and demand are elastic) 0 Rental Price of Apartment Quantity of Apartments Demand Supply Controlled rent Shortage
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Housing market with a rent ceiling
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Housing market with a rent ceiling In a housing market with a rent ceiling, the quantity of units available is less than the equilibrium quantity and so is less than the efficient quantity. Rent ceiling leads to inefficiency . Rent ceiling creates underproduction MSB is greater than MSC reduce consumer and producer surplus deadweight loss arises.
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Housing market with a rent ceiling A housing shortage: Because the rent ceiling is below the equilibrium The quantity supplied must be allocated among frustrated demanders through increased search activity. Increased search activity:
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This note was uploaded on 10/13/2011 for the course ECON 101 taught by Professor Vanderwaal during the Spring '08 term at Waterloo.

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Lecture_6 - Lecture 6 MARKETS IN ACTION SUPPLY, DEMAND,...

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