Lecture_Chapter6

Lecture_Chapter6 - Lecture 4 : Government Policies (Chapter...

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

View Full Document Right Arrow Icon
Lecture 4 : Government Policies (Chapter 6)
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 FIGURE 1: The Circular-Flow Diagram Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production Labor, land, capital Spending G & S bought G & S sold Revenue Markets for Goods & Services
Background image of page 2
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 3 Government Policies That Alter the Private Market Outcome Price controls Price ceiling : a legal maximum on the price of a good or service Example: rent control Price floor : a legal minimum on the price of a good or service Example: minimum wage Taxes The govt can make buyers or sellers pay a specific amount on each unit bought/sold. We will use the supply/demand model to see We will use the supply/demand model to see how each policy affects the market outcome how each policy affects the market outcome (the price buyers pay, the price sellers receive, (the price buyers pay, the price sellers receive, and eq’m quantity). and eq’m quantity). We will use the supply/demand model to see We will use the supply/demand model to see how each policy affects the market outcome how each policy affects the market outcome (the price buyers pay, the price sellers receive, (the price buyers pay, the price sellers receive, and eq’m quantity). and eq’m quantity).
Background image of page 3

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

View Full DocumentRight Arrow Icon
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 4 EXAMPLE 1: The Market for Apartments Eq’m w/o price controls Eq’m w/o price controls P Q D S Rental price of apts $800 300 Quantity of apartments
Background image of page 4
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 5 How Price Ceilings Affect Market Outcomes A price ceiling above the eq’m price is not binding has no effect on the market outcome. P Q D S $800 300 Price ceiling $1000
Background image of page 5

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

View Full DocumentRight Arrow Icon
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 6 How Price Ceilings Affect Market Outcomes The eq’m price ($800) is above the ceiling and therefore illegal. The ceiling is a binding constraint on the price, causes a shortage. P Q D S $800 Price ceiling $500 250 400 shortage
Background image of page 6
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 7 How Price Ceilings Affect Market Outcomes In the long run, supply and demand are more price-elastic. So, the shortage is larger. P Q D S $800 150 Price ceiling $500 450 shortage
Background image of page 7

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

View Full DocumentRight Arrow Icon
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 8 Shortages and Rationing With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms: (1) Long lines (2) Discrimination according to sellers’ biases These mechanisms are often unfair, and inefficient: the goods do not necessarily go to the buyers who value them most highly. In contrast, when prices are not controlled,
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.

This note was uploaded on 12/02/2011 for the course ECON ECON200 taught by Professor Songhualin during the Fall '11 term at Maryland.

Page1 / 32

Lecture_Chapter6 - Lecture 4 : Government Policies (Chapter...

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