ECON 1B03 Lecture Notes - Lecture 13: Price Ceiling, Economic Equilibrium, Shortage

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14 Feb 2016
Department
Course
Professor
Micro Econ
Lecture 13
Government Policies
Recall: in free unregulated market system, market forces establish equilibrium
prices and exchange quantities
- While equilibrium conditions may be e%cient, it may be the case that not
everyone in society is satis&ed and the government may want to get involved
—equity not e%ciency on the mind
Price Controls
- Government freezes prices at a predetermined level that they feel will make
members of society better o+ - Usually enacted when policy makers believe
market price is unfair to buyers or sellers
- “government thinks equilibrium price is not fair to everybody and tries to
make more fair
Price Ceiling
-Max price you can legally charge for good/service
- Binding (e+ective) if set below equilibrium price, leading to a shortage – must
be < equilibrium price not equal
Ex – rent control – government wants to
make housing more a+ordable for low
incomes, so sets max rice ceiling for
housing that is lower than equilibrium price
- At any one point in time, # of apts is
&xed, so supply is perfectly inelastic in
the short run
- Potential renters make demand more
inelastic and react more in the long run,
taking their time to adjust housing arrangements
In the Long Run:
- low rents mean landlords may convert to condos get out of rental business, or
make current apts unlivable, so supply is elastic
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- Low rents encourage people to look for housing (move out if price is right), so
demand is elastic
- Where rent control exists, landlords must resort to non-price rationing of
housing:
- keep waiting lists, discriminate (no children, pets etc), take bribes (key
money), get out of rental business
Qu:
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Equilibrium Price --- P= $650, sub back in to
equation to get Equilibrium of $400
If the rent ceiling is $500—sub in this for P, get
Qd=700, Qp =100
Shortage = Qd-Qs = 600 Apts
Price Ceiling E+ects
-Shortages get worse over time
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