econ ch 4 outline - Kristin Chen Econ Ch 4-The Market...

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Kristin Chen Econ Ch 4—The Market Strikes Back 1. Why Governments Control Prices a. Strong political demand for gov’t to intervene b. Price controls = when a government intervenes to regulate prices i. price ceiling = upper limit ii. price floor = lower limit 2. Price Ceilings a. Usually employed when sudden price increases can hurt many people but produce big gains for a few i. Ex: WWII, CA electricity b. Modeling a price ceiling i. Horizontal line on graph ii. Creates a shortage when imposed under equilibrium price c. Why does it cause inefficiency? i. Shortages inefficiency ii. Inefficient allocation to consumers = people who want the good badly and are willing to pay a high price don’t get it, and those who care relatively little about the good and are only willing to pay a low price do get it iii. Wasted resources = people spend money and expend effort in order to deal with the shortages caused by the price ceiling iv. Inefficiently low quality = sellers offer low-quality goods at a low price even though buyers would prefer a higher quality at a higher price v. Black markets = market in which goods or services are bought and sold illegally d. 3 common results of price ceilings i. Persistent shortage of the good ii. Inefficiency
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1. inefficient allocation 2. wasted resources 3. inefficient low quality iii. Black markets 3. Price Floors a. Minimum wage = legal floor on the wage rate, which is the market price of labor i.
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