6 Econ Class notes - Ch. 6: Supply, Demand, and Gov't...

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Ch. 6: Supply, Demand, and Gov’t Policies a. Law of supply and Demand states a. Prices will adjust so that QS=QD (the most efficient allocation) i. Free markets ii. Full information iii. No externalities iv. No market power b. If the government participates in the market, we say the market is not free a. Government can i. Control prices ii. Tax I. Price controls----------- Are bad a. Price ceilings i. The legal maximum in which a good can be sold b. Price floor i. The legal minimum in which a good can be sold c. Effects of price ceiling i. If price ceiling is above equilibrium, it is not binding 1. Pe and Qe do not change ii. What if price ceiling is below equilibrium? 1. Here, it is binding 2. A binding price ceiling will lead to a shortage 3. with the shortage, the market must develop a rationing system a. First come, first serve (line)------Most common b. Lottery c. Friends, family d. Discrimination e. Black market f. Scalpers d. 1
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II. Case Study: Lines at the Gas Pump a. In 1973 OPEC raised its price on crude oil i. 2 b. Government places a price ceiling at the equilibrium c. Causes a shortage which is rationed by first come, first serve line
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This note was uploaded on 04/08/2008 for the course ECONOMICS 211 taught by Professor Petitfrere during the Fall '08 term at University of Miami.

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6 Econ Class notes - Ch. 6: Supply, Demand, and Gov't...

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