Some rationing mechanisms may lead to huge problems

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Some rationing mechanisms may lead to huge problems: long lines ● Discrimination according to sellers’ biases Also, rationing mechanisms are often inefficient: buyers who value certain goods and services the most (and would love to pay for them at higher prices) may not get them
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GESB 1006: Economics of Everyday Life University of Macau Illustrative Example 2: Market for Unskilled Workers Equilibrium without price controls W L D S Wage paid to unskilled workers $6.00 500 Quantity of unskilled workers
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GESB 1006: Economics of Everyday Life University of Macau Illustrative Example 2: Market for Unskilled Workers A price floor below the equilibrium price is not binding has no effect on the market outcome. W L D S $6.00 500 Price floor $5.00
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GESB 1006: Economics of Everyday Life University of Macau Illustrative Example 2: Market for Unskilled Workers The equilibrium wage ($6) is below the floor and therefore illegal. The price floor is binding , causes a surplus (i.e., unemployment). Minimum wage laws do not affect highly skilled workers. They do affect teen workers. A 10% increase in the minimum wage raises teen unemployment by 1% 3%. W L D S $6.00 Price floor $7.25 400 550 labor surplus
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GESB 1006: Economics of Everyday Life University of Macau In-Classroom Discussion “If the federal minimum wage is raised gradually to $15 -per-hour by 2020, the employment rate for low-wage U.S. workers will be substantially lower than it would be under the status quo.”
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GESB 1006: Economics of Everyday Life University of Macau Active Learning 1: Price Control 50 60 70 80 90 100 110 120 130 60 70 80 90 100 110 120 130 Q P S 0 The market for hotel rooms D The market for hotel rooms is in equilibrium as in the graph. Determine the effects of: A. $90 price ceiling B. $90 price floor C. $120 price floor
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GESB 1006: Economics of Everyday Life University of Macau Active Learning 1: Price Control - $90 Price Ceiling 50 60 70 80 90 100 110 120 130 60 70 80 90 100 110 120 130 Q P S 0 The market for hotel rooms D The price falls to $90. (binding price ceiling below the equilibrium) Buyers demand 120 rooms, sellers supply 90, leaving a shortage. shortage = 30 Price ceiling
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GESB 1006: Economics of Everyday Life University of Macau Active Learning 1: Price Control - $90 Price Floor 50 60 70 80 90 100 110 120 130 60 70 80 90 100 110 120 130 Q P S 0 The market for hotel rooms D Equilibrium price is above the $90 price floor, so the price floor is not binding. P = $100, Q = 100 rooms. Price floor
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GESB 1006: Economics of Everyday Life University of Macau Active Learning 1: Price Control - $120 Price Floor 50 60 70 80 90 100 110 120 130 60 70 80 90 100 110 120 130 Q P S 0 The market for hotel rooms D The price rises to $120. (binding price floor above the equilibrium) Buyers demand 60 rooms, sellers supply 120, causing a surplus . surplus = 60 Price floor
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GESB 1006: Economics of Everyday Life University of Macau Evaluating Price Controls Economists usually oppose price ceilings and price floors.
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