Lecture 8 - Announcements We will probably do most or all...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Announcements We will probably do most or all of this on Monday. I’m posting them now in case the experiment goes haywire. Aplia payment “grace period” ends on Monday! Enter your payment code now if you have not. Finishing ch4 on Monday and starting ch5 on Monday or Wednesday. HW for ch4 due Monday night.
Background image of page 1

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

View Full DocumentRight Arrow Icon
EXCESS DEMAND (Shortage).
Background image of page 2
The Price System: Rationing Whenever a shortage exists, the good in question must be rationed in some way. 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).
Background image of page 3

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

View Full DocumentRight Arrow Icon
The Price System: Rationing price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.
Background image of page 4
Lumber Example 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? P Q S 1972 D 1972 A B S 1970 D 1970 $26.70 $56.76
Background image of page 5

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

View Full DocumentRight Arrow Icon
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 free up more land for lumber, lower tariffs (taxes on imports) or get rid of quotas (limits on imports) on lumber from Canada.
Background image of page 6
Lumber (continued) 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).
Background image of page 7

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

View Full DocumentRight Arrow Icon
Other methods of rationing: market interference On occasion, both governments and private firms decide to use some mechanism other than the market system to ration an item for which there is excess demand at the current price. Regardless of the rationale, two things are clear:
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 27

Lecture 8 - Announcements We will probably do most or all...

This preview shows document pages 1 - 9. Sign up to view the full document.

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