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Chapter 6 Notes - Chapter 6 Supply Demand and Government...

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Chapter 6: Supply, Demand, and Government Policies Control on Prices How Price Ceilings Affect Market Outcomes 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 When the gov imposes a price ceiling on the market for ice creams two outcomes are possible (the equilibrium price is $3 a cone) o Gov imposes a price ceiling of $4 per cone o Because price that balances supply/demand is $3 is below the ceiling, the price ceiling is not binding o Market forces naturally move the economy to the equilibrium o Price ceiling has no effect on the price or the quantity sold Gov imposes a price ceiling of $2/cone o Since equilibrium price is $3 the ceiling is a binding constraint Forces of supply/demand tend to move price to equilibrium When the market price hit the ceiling, it cant rise any further So market price = price ceiling There is a greater demand but not enough supply Shortage of ice cream Some people cant have it When shortage of ice cream develops because of price ceiling some mechanism for rationing ice cream will develop Long lines Sellers could ration ice cream because of personal preferences o Friends/family This is inefficient When the gov imposes a binding price ceiling on a competitive market, a shortage of the good arises o Sellers must ration the scarce goods among the large number of potential buyers When market for ice cream reaches equilibrium, anyone who wants to pay the market price can get a cone How Price Floors Affect Market Outcomes
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Gov is persuaded by the pleas of the National organization of Ice-cream makers They institute a price floor o Places a legal minimum When gov imposes a price floor on the ice cream market, two things can happen o gov imposes a price floor of $2 when the equilibrium is $3 b/c equilibrium price is above the floor then its not binding market forces naturally move the economy to equilibrium and the price floor has no effect o gove imposes a price floor of $4 o it’s a binding constraint on market o forces of supply/demand tend to move the price toward equilibrium price o when price hits the floor it can go no further o quantity of ice cream supplied exceeds quantity demanded o some people who want to sell ice cream at the going price are unable to o binding floor causes a surplus Case Study: The Minimum Wage min wage laws dictate the lowest price for labor that any employer may pay established to ensure workers a minimally adequate standard of living Effects market w/o Min Wage o Workers determine the supply of labor o Firms determine demand o If gov doesn’t intervene the wage normally adjusts to balance labor
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