Chapter 6 Powerpoint

Chapter 6 Powerpoint - Supply, Demand and Government...

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Supply, Demand and Government Policies (Application of S&D Analysis) Chapter 6
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2 Supply, Demand, and Government Policies Using S&D analysis, we will study the effect of govnt policy like „Price Control‟ In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. But suppose that govnt feels the Eq is NOT right
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3 Price Controls. .. Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Result in government-created 1. price ceilings and 2. price floors.
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4 Price Ceilings & Price Floors Price Ceiling A legally established maximum price at which a good can be sold. Price Floor A legally established minimum price at which a good can be sold.
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5 Price Ceilings Two outcomes are possible when the government imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage.
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A Price Ceiling That Is Not Binding. .. $4 3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply Price ceiling Equilibrium price 100 Equilibrium quantity
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A Price Ceiling That Is Binding. .. $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied
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8 Effects of Binding Price Ceilings A binding price ceiling creates . .. shortages (excess demand) because Q D > Q S . Example: Gasoline shortage of the 1970s nonprice rationing Examples: Long lines, Discrimination by sellers
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9 Example1: Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline.
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10 The Price Ceiling on Gasoline Is Not Binding. .. $4 P 1 Quantity of Gasoline 0 Price of Gasoline Q 1 Demand Supply Price ceiling 1. Initially, the price ceiling is not binding. ..
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11 The Price Ceiling on Gasoline Is Binding. .. P 1 Quantity of Gasoline 0 Price of Gasoline Q 1 Demand S 1 Price ceiling S 2 2. …but when supply falls. ..
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This note was uploaded on 11/16/2011 for the course ECON 202 taught by Professor Kim during the Fall '11 term at CSU Fullerton.

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Chapter 6 Powerpoint - Supply, Demand and Government...

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