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L5- Government Policies CH 6

L5- Government Policies CH 6 - Price controls Price ceiling...

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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).
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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
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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
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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
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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
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Shortages and Rationing With a shortage, sellers must ration the goods among buyers.
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