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CHAPTER 5- Markets in Action.docx

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McGill University
Economics (Arts)
ECON 208
Sebastien Forte

CHAPTER 5: Markets in Action  Partial equilibrium analysis examines a single market in isolation and ignores feedback effects from other markets  In general, this is appropriate when the specific market is quite small relative to the entire economy  Most of microeconomics used partial equilibrium analysis  When economists study all markets together they use general-equilibrium analysis. This is more complication because you are analyzing the whole market simultaneously Government controlled prices:  Disequilibirium price:  If the the price is set above equilibrium, producers will want to produce more, and some sellers will be unable to find buyers (there will be a surplus)  If the price is below equilibrium, some buyers will be unable to find sellers (a shortage)  With administered prices, the quantity (exchanged) is determined by the lesser of quantity demanded and supplied  PRICE FLOORS:  Price floors make it illegal to sell the product below the controlled price  Ex) milk quotas  If you put it below the equilibrium it wouldn’t be binding because it wouldn’t be illegal to charge more, and people would charge the equilibrium  A black market is any market in which goods are sold at illegal prices  A common example of a price floor is the legislated minimum wage- do minimum wages lead to unemployment?  PRICE CEILINGS:  Shortage- excess demand, surplus- excess supply  A price ceiling is the maximum price at which a product may be exchanged  Ex. Rent control (and you end up with an excess demand)  Typically, a government has one or more of the three main objectives in imposing a price ceiling: restrict production, keep specific prices down, satisfy (normative) notions of equity  Rent controls:  Binding rent controls are a specific for of price ceiling. We can use the previous diagram to predict the effects: a housing shortage, alternative allocation schemes in black market, illegal schemes like “key money”  Existing tenants in rent controlled apartments win, landlords lose, and potential future tenants also suffer  Policy alternatives to price ceiling: housing shortages can be reduced if the government (at the taxpayer’s expense) either subsidizes housing production or produces public housing directly  The government may also provide lower-income households with income assistance  No policy is “free” – every policy involved a resource cost  Market efficiency  Legislated minimum wages make firms and some workers worse off, but benefits those workers who retain this jobs  Rent controls make some tenants better off at the expense of landlords and harm other tenants  Price corresponding to a specific quantity demanded is the highest price consumers are willing to pay—as shown by the height of the demand curve  Price corresponding to a specific quantity supplied is the lowest price producers are willing to accept- as shown by the height of the supply curve  Price tells us what the quantity demanded is  What is economic surplus? Consumer surplus + producer surplus  Economic surplus is maximized at the competiti
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